There were some signs on Tuesday that the market was starting to undergo a transition and that's accelerating on Wednesday morning. Small-caps look particularly poor, but the larger indexes still have support.
The Chicago PMI came in much worse than anticipated, and there are concerns building about the deterioration of the economy in China. To make matters worse, the odds that the Fed will hike rates another 0.25% in two weeks are now over 70%.
The AI frenzy is taking a rest, and the number of stocks that are attracting speculative interest is very slim. I run a market scanner that finds stocks that are moving more than 10% and another one that shows stocks that are moving on increased volume. Both scans have only a handful of names today, and there is nothing in that AI sector. One name that showed up on the scan that I am buying is Nano-X Imaging (NNOX) .
From a stock picking standpoint, it is very thin pickings. We have a small group of extended AI names that need a rest, and most everything else is lifeless and trying to find support. There are no good themes outside of AI.
Ironically, Apple (AAPL) and Microsoft (MSFT) are still green. These stocks are not cheap, but they are viewed as safe havens where funds can be parked. Apple, for example, will have no EPS growth in 2023 and maybe 10% EPS growth in 2024, but still trades with a trailing PE of 30. That is very expensive, but it doesn't matter because Apple is viewed as a safe stock if a recession hits. The downside is likely limited as there will always be a supply of buyers that are anxious to add on dips.
The selling has been steady all morning, and breadth is inching up to around 3 to 1 negative. There are over 200 new 12-month lows and only 30 new 12-month highs.
This action is a significant change in character, and there is a good chance that downside momentum may build from here.
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