Hey trader,
I drive my kids to school in Chicago every morning. The route home takes me 15 minutes through the city because they changed the bridges.
It used to take five.
I have been making this drive for years. Something changed recently.
There are fewer cars on the road and fewer Uber drivers in sight.
More people are walking now. Young, old, all ages, taking public transit and riding bikes to avoid spending money they do not have.
I see it every single day. The consumer is breaking in real time, and you can spot it from a car window if you pay attention.
This week I spent five days teaching members how to spot changes in market leadership. I referenced Led Zeppelin's "When the Levee Breaks" because that is exactly where we are.
The cracks are forming and the water is rising. The levee has not failed yet, but the pressure is building from underneath.
Toy Story Is Over
Mattel missed during its bread-and-butter quarter. Q4 is where they make 75% of all their sales.
They missed on Christmas and Black Friday. Then they guided lower.
That is the kiss of death.
This is consumer discretionary, not consumer staples. It is wide open for the beating of a lifetime.
We are living in what I call a K economy. The top 10% controls 90% of spending and the other 90% are in a bunker.
They are doubling up with relatives and skipping healthcare. They are cutting back on food, beverages, and ride-shares.
Consumer spending makes up 70% of this economy. The average consumer has their hands in their pockets.
Pay attention to the clues:
- Hood fell apart and Lyft fell apart. Mattel got blown out during Christmas.
- DraftKings beat by 3 cents and the market said it did not care. The stock trades at a 42 multiple for a company growing at barely 10%.
- People are walking instead of taking Uber because they cannot afford it anymore. These are not random data points.
The Two Pillars Holding Up the Market
The XLK and the XLF together make up roughly 67% to 70% of the S&P 500 on any given day. Two sectors account for two thirds of the entire market.
Both are sitting in overbought territory on the Aroon indicator. The daily on the XLF is already bearish.
The weekly is still bullish, but by a thread.
The XLK is mildly bearish on the daily. If the blue line breaks through 50 and drops to 30 on the Aroon, the dip buyers will evaporate like condensation on a shower.
Three defensive sectors are holding the market up on a thread. When the leaders break, the defenders will not save you.
Consumer staples cannot carry this market. Energy will not be enough either.
What I Am Doing Now
I am only 250 deltas long. I used to run 800 to 1,000.
I am exiting energy positions and holding every short. I am lightening up across the board.
I waited five weeks for my Coke short trade. I hit it just right because that is what this market demands.
Momentum changes precede trend changes. You cannot turn a car at full speed without flipping it.
You have to slow down first. That is what the market is doing right now.
The Genesis COG System tracks these momentum shifts across sectors and individual stocks simultaneously. It identifies when leadership is deteriorating before the price confirms it.
When the weekly and daily both break at the same time on the XLK and XLF, it is over. The system is built to get you out ahead of it.
Have a good weekend. The levee is holding, for now.
Professor Jeffrey Bierman
Creator of the Genesis COG System