Wednesday Was All About Tech De-grossing
Not tariffs
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I wanted to send out a quick note to touch on a few things I'm thinking about tonight after today's sell-off.
First, we have seen the VIX roll-off (chart 1) without a commensurate rally in SPX.
It looked like one had been forming, but it collapsed. That's worrying and unsustainable, and to me, it implies one of two things is likely to happen:
VIX will rally (perhaps sharply, which would likely lead to a sell-off) to a level commensurate with caution and risk-off
Prices will fall
The second chart shows a measure of market breadth, of S&P 500 stocks above various DMAs.
You’ll notice that none of them budged much. That’s because we had more stocks advance in the S&P 500 than decline today, as impossible as it seems.
That’s because today’s sell-off was heavily about tech degrossing.
Knowing this, let’s look at moving averages of specifically tech stocks.
Quite a bit weaker.
“But,” you might say, “I thought today was about tariffs; why would tech stocks care about tariffs?”
Good question, and in it lies your answer: today was not really about tariffs.
I’d go so far as to say that a large part of the sell-off was driven by a technical rejection at NQ’s 200DMA that sparked a tech rout.
Helped by some negative data center news that likely contributed to NVDA’s outsized loss.
Looking back at the start of the sell-off we can see that “momentum” names were at their most “crowded” level of all time in early February. (Shoutout
for these charts).
They’ve since reversed sharply to a low at the 86th percentile, notably around the same level they fell to in the yen carry trade unwind last August.
Now, “Low Vol” peaking, reaching levels of crowding we haven’t seen since the risk-off meta of 2022. This “flight to safety” trade could have room to run or it could be stalling out.
When you combine all this, you get a somewhat interesting picture of a market highly dependent on high-momentum names that are technically weak. Whereas in September, the money started flowing into them promptly to form a V-shaped recovery, we see more caution this time.
Based on everything here, caution seems warranted. If tech were to “crack” meaningfully, it could be disastrous for the indices. Vol appears to be underpricing that risk, although it could change rapidly.
I’ll watch the tech sector's fundamentals closely as we advance and likely look to buy some Vol while it’s still cheap.
Good luck out there.
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