Get Out

Comfort Is a Warning

One of the most unsettling parts of Get Out is how quickly the narrative shifts.

From initial, polite conversations and smiles, comes a feeling of dread, betrayal and horror.

At first, everything feels fine.

Chris - the film’s protagonist - visits his girlfriend’s family and is greeted by smiles and warm, beckoning arms.

But as the film progresses, you know that something isn’t right.

Soon enough, Chris is trapped - sent into what the film calls “The Sunken Place” - a state where he can see and hear what’s happening, but can’t control his body.

That’s where this market sits today.

Right now breadth is rosy and the market is opening its arms, inviting traders to come in, sit down and enjoy a cup of tea.

But in the background, something sinister is building.

NVDA Earnings

Last week I was eager to highlight the importance of NVDA earnings in the context of the wider market.

For those that missed it, here’s a brief summary.

If NVDA breaks the range to the upside, game on. If it breaks lower - then it's super difficult to imagine SPY or QQQ staying afloat much longer.

Here’s what played out...

After beating and raising, NVDA was well and truly slimed during yesterday’s session, suffering a drop of 5.46% after initially popping 5% higher after hours.

Call it a trap, call it options positioning, I don’t care.

What I do care about is the fact that once again NVDA sold off on good news, falling below the same layer of resistance that’s been in play for the best part of five months.

How did that resonate with QQQ, which has been in a similarly choppy range for months now?

Price once again found sellers below the key convergence zone which sits at the anchored VWAPs from the ATHs and November low, as well as the 50dma.

MAGS suffered too. Selling off hard at the key $63 pivot, extended way below a declining 50dma - hovering dangerously above the AVWAP from the April lows.

Too Many Broken Charts, Too Much Hopium

For months now I’ve been pounding the table on some of the market’s weakest looking charts, citing XLY/XLP amongst others as the clearest warning sign that beneath the surface, all is not well.

For those at the back, this shows the clearest sign that the market is in ‘risk off’ mode right now - with XLY/XLP completing a classic head and shoulders top and sliding to multi-month lows.

Tech relative to the broader market doesn’t look great either. Despite XLK/SPY holding above a key pivot, the reality is that it’s fallen as much as 9% from the highs, despite the main indices hovering less than 2% from the same level.

And then there’s crypto…

Here’s Bitcoin’s price action since reaching new all-time highs late last year. Bear flags breaking down, every rally getting sold and not a higher high in sight. And that’s without mentioning that in the same five months that QQQ and SPY have been chopping within a range, this thing has fallen over 50%.

So Why Aren’t We Selling?

If you were to show me these charts in isolation and asked me to guess where SPY was in relation to its prior highs, I wouldn’t guess 2%. And yet here we are.

The reality is that under the surface, rotation and breadth have been keeping the main indices afloat.

To put it succinctly, whilst last year’s leaders have fallen off a cliff - BTC, MSFT, IGV, APP, the list is too long to mention them all - defensive sectors have been enjoying some time in the sun.

XLE, multi month highs:

XLU, all time highs:

XLP, multi month highs:

Combined, this defensive rotation is what’s keeping SPX afloat right now.

If you’ve been in Staples, Utilities, Trannies or Utilities for the last few months, you’re likely way ahead of the indices on a YTD basis.

But the reality for so many traders is that these areas remain underexposed in our portfolios - simply due to the fact that in bull markets, it’s growth, high beta and tech that shines the brightest.

Instead of looking at John Deere we look at Coinbase.

Instead of looking at Chevron we look at Meta.

That’s just the nature of the beast. And it bull markets, it’s a strategy that pays.

But when the reality becomes painfully obvious- defensives have been leading for months now, not weeks - it’s not beyond the realms of possibility to call the bull market’s legitimacy into quesiton.

Like Chris in Get Out, we’re fooled by the market’s polite smiles and courteous gestures, rather than assessing what’s actually playing out under the surface.

A Sell is Likely Coming

Whilst you might be thinking of leaning heavily into Consumer Stapes at this point - the move looks overextended in my view, but you do you - I’m looking at what defensive outperformance tells us about the future direction of the wider market.

In the top panel of this chart is SPY. In the lower panel XLP/XLY.

Let’s keep it simple. When bottom panel goes up, top panel comes down: signaling that whenever XLP has outperformed SPY on a relative basis (dating back to 2020), SPY has reacted on each occasion with a swift and sharp move lower.

On a technical level, further signs of weakness can be found by simply looking at instances where SPY has made a new high which hasn’t been confirmed by RSI:

And just for arguments sake, let’s throw in instances where the weekly MACD has shown a similar divergence with SPY on the weekly chart.

Getting Out

During today’s session I’ll be exiting my remaining long exposure. The asymmetric opportunity I saw in certain names is looking too speculative and too many charts are broken.

And whilst many are leaning into ambitious upside targets, calling for fresh breakouts and new highs, I’m seeing better value in defined-risk downside exposure.

Could I be wrong? Absolutely.

If NVDA reclaims its range. If QQQ powers through that anchored VWAP cluster. If growth reasserts itself and breadth expands instead of contracts — I’ll adapt like I always do.

But right now, the posture that makes the most sense to me is defensive.

Because when the market starts inviting everyone in, when volatility compresses, when broken leaders are quietly ignored and defensives are doing the real work - that’s not when I feel comfortable pressing longs.

Maybe this resolves higher.
Maybe the tea really is just tea.

But until proven otherwise, I’m choosing not to sit in the Sunken Place - watching price action unfold while hoping it turns in my favor.

If I’m wrong, I’ll pay for protection and pivot.

If I’m right, I won’t be scrambling for the door with everyone else.

Sometimes the most profitable trade isn’t the boldest prediction.

It’s knowing when to get out.