JPM On What’s Behind The Market Selloff

With stocks sliding for the second day in a row, and decisively ending a streak that saw the S&P hit record highs on 13 of the past 16 trading days, traders are stumped trying to figure out what’s behind the market’s weakness.

Addressing this topic, JPM senior trader Brian Heavey had some observations, which however won’t be especially actionable because as he admits, “short answer is there is no “great” reason for the sell off.” Here are his thoughts on what’s behind the air pocket in the market.

• Market internals have been weakening for days now and it seems the violent sell-off was only a matter of time.

• Bank stocks struggling to rally to could be the canary in the coal mine once again forQ2 earnings season (recall retail prints were generally sold amid elevated expectations despite VERY strong prints vs. consensus).

• Rates continues to come down and value/cyclical simply can’t find it’s footing at the moment. Days like today give us a window into positioning and it is clear the specialty retail trade (GPS, AEO, LEVI, etc) remains well owned. Low quality packaged food(CAG, etc), grocery stores and home improvement all outperforming (names that have been popular shorts of late).

• Also hearing LOW sounded positive at competitor’s fireside chat today.

• FLOW WISE – We were better sellers in retail to start the day (LB the only buy name).When IWM held around 2pm (precisely at 2pm which was strange…) we saw someHFs bottom feeding some popular longs (ASO in particular

And here is some additional technical trading color from JPM’s Ron Adler:

• Overall market action and deal performance are providing more ammunition to the general risk-off and fatigue theory of late.

• Thursday saw more deals pricing at the low end/trading below while the Renaissance IPO Index (IPOUSA Index) continues to flag.

• The demand in MSFT/AAPL/AMZN/GOOGL over the past few days is notably absent, and without the titular heads of the market (reads: Megacap tech) of late, the market would be much, much lower.

• It feels like we’re preparing for a bit of a drawdown/vacuum as traders right-size positions ahead of the heart of earnings season.

• We continue to see more HF profit taking (and some shorts) in Growth Software/Internet; A/D lines are also starting to add to the tally of the decliners.

To this we have just one question: back on June 21 the ES exploded almost 300 points higher over the next 4 weeks after Biden had a private sitdown with Powell and Yellen.

How long until he has another one?