OVERVIEW
The Market Is More Vulnerable Than You Think

We don’t usually focus on the Dow Jones Industrial Average in this newsletter, but this time it’s impossible to ignore. The Dow just posted nine straight days of losses, something that hasn’t happened since 1978. For a bit of context, the Dow tracks 30 large, blue-chip companies from various industries—think of it as a snapshot of America’s corporate giants. Unlike other indices like the S&P 500, it’s price-weighted, meaning stocks with higher prices carry more influence on its movement. It tends to reflect the performance of older, established sectors like industrials, financials, and healthcare, rather than the high-growth tech names we often associate with today’s market rallies.

This historic losing streak is a reflection of shifting market dynamics. Investors have been rotating heavily into technology stocks, chasing returns in the mega-cap tech giants that have driven most of this year’s gains. As a result, the “old economy” sectors that dominate the Dow—industrials, financials, and energy—are losing steam. These sectors had a strong run in November, benefiting from a surge of optimism following Donald Trump’s re-election, but the momentum has faded as traders look elsewhere.

Adding to the Dow’s challenges is the uncertainty surrounding the Federal Reserve’s upcoming interest rate decision. There’s a 95% chance of a 0.25% rate cut, according to CME Group data, but that hasn’t eased market concerns. Investors are worried the Fed might be overstepping—either fueling a bubble in the tech-heavy Nasdaq or risking a resurgence of inflation. This hesitation is leading to profit-taking in the Dow’s sectors, while the Magnificent 7 tech stocks continue to dominate flows.

What’s striking is the disconnect between the surface-level market strength and the reality underneath. While the Nasdaq 100 is hitting new highs, driven by its largest components, equally weighted indices like the RSP or QQQE reveal that the average stock is actually struggling. It’s a tale of two markets: large-cap tech continues to climb, while most other sectors, including those in the Dow, are facing headwinds.

Momentum is clearly favoring tech, but it’s worth keeping a close watch on how the Fed’s decision might shake up these dynamics. The Dow’s rare losing streak isn’t just a piece of trivia—it’s a signal of where the market’s focus and risks currently lie.

On top of this, the recent performance of new positions in these tech names has been challenging for traders seeking solid follow-through. The big leaders—AAPL, TSLA, GOOG, and others—aren’t offering clear, viable entry points. Instead, they’re simply rallying higher, becoming increasingly extended. This lack of fresh setups is already raising concerns about how sustainable this move can be. Without healthy pullbacks or consolidation to reset and attract new buyers, the current tech rally risks running out of steam and seeing a sharp retracement.

Nasdaq

The Nasdaq had an inside day yesterday, with some profit-taking starting to show at the new highs in the $530s. The strength of the QQQ has been undeniable. Since breaking above its point of control (POC) in late December, around the $505-$506 level, the QQQ has been on a tear, barely pausing for breath.

Currently, we’re seeing a low-volume pocket form between $535 and $531, which is likely to get tested if profit-taking picks up today or if the market reacts weakly to the Fed's rate decision later this afternoon. The rally here is vulnerable, mainly because it’s so narrow—just a handful of stocks, primarily the Magnificent Seven, are driving the entire strength. If these key stocks decide to pull back, it could have a significant impact on the health of the QQQ as a whole.

S&P Midcap 400

The midcaps are facing significant selling pressure as they break down below their point of control (POC) at $600. This move, along with the 10-EMA crossing below the 20-EMA, signals weakness, and the index is now resting on its daily 50-EMA at $592. This level is critical, as it’s the last line of defense before the index potentially faces a deeper decline toward the rising 200-EMA.

Yesterday’s session was notably weak. The day started with an attempt by the MDY to push higher and test its POC level, but it was met with strong selling pressure and a lack of buying interest. This indicates that momentum to the downside is not fading, and unless the index can regain some strength, it will face further downside in the near term making a recovery even more long winded.

Russell 2000

The small caps mirrored the midcaps in yesterday’s session, with a notable sell-off and high relative volume pushing the IWM down to its $231 level, right at the rising 50-EMA. This is the key support area for buyers to step in and prevent further downside. We haven’t seen much relief in the pullback across small caps, midcaps, or even large caps, which makes us think that a consolidation or a pause in this downtrend may be overdue. However, trying to predict this bounce could be risky, as the momentum remains firmly bearish.

Right now, there’s little reason to look for new exposure in any of the major indices, especially with the Fed decision looming and the overall market breadth so poor. Instead, the focus should be on running scans to identify stocks, regardless of market cap, that are showing relative strength and building actionable bases. These are the stocks most likely to become the future leaders when the market eventually turns.

DAILY FOCUS
Better To Be Out & Want In, Than In & Want Out

The rally in December has largely been driven by the Magnificent Seven tech stocks—Tesla (TSLA), Alphabet (GOOGL), Amazon (AMZN), and Apple (AAPL)—all of which have been hitting fresh record highs. Even on days when the broader market struggles, these stocks keep pushing higher, showing their strength.

Each of these stocks has its own story. For example, Tesla’s recent momentum can be linked to CEO Elon Musk’s ties to Donald Trump and the post-election rally. However, there’s a bigger trend emerging: the Magnificent Seven are becoming a safe haven for investors amid market uncertainty. As the broader economic landscape remains unpredictable, more and more investors are flocking to these large-cap tech stocks, seeing them as a stable bet in an unstable environment.

Practically speaking, if you haven’t already been positioned in these tech leaders—like TSLA, AVGO, or AAPL—you probably haven’t seen much growth in your portfolio. In fact, new positions have likely resulted in some frustrating paper cuts. Given the market’s current state, breakouts are hard to come by, and seeing follow-through has been even rarer. On top of that, today’s Fed rate decision, with a 95% chance of a 25 basis point cut already priced in, is adding to the uncertainty. These events rarely lead to predictable, actionable volatility, which makes it tough to ride out clear trends.

For us, the focus today is on sitting tight. We’ll be watching how the market reacts to Jerome Powell and the Fed’s decision. The goal is to see if the market shifts in a way that signals a potential recovery in some of the beaten-down sectors or if we’re headed for more downside. There’s no rush to jump into new trades right now—the risk just isn’t worth it.

WATCHLIST
Some Relative Strength Leaders

DDOG: Datadog, Inc.

• DDOG has been one of the strongest performers over the last two months. After breaking out of a long-standing base in late November, the stock surged from $125 to $170 in just two weeks, all while holding above its daily 10-EMA without a single pullback. This impressive move came on high relative volume, showcasing strong investor demand.

• What sets DDOG apart is that it’s in one of the most resilient market groups—software. The stock has been building a volatility contraction along its daily 10-EMA and 20-EMA, consolidating and holding steady with support on any pullbacks below the 10-EMA. This setup indicates strong demand and suggests it could be ready for another leg higher once the market conditions stabilize.

• While we’re not looking to take a position today, especially ahead of the Fed's rate decision, DDOG is one of the names we’re keeping a close eye on. If the relative strength continues and we see a high-volume breakout in the coming days, it could present an attractive entry opportunity.

SE: Sea Limited

• SE is another stock we’re closely monitoring right now. The Chinese internet and mobile platform company, which offers online gaming services, has been showing strong relative momentum. It has been holding above its daily 10-EMA and 20-EMA while building a series of higher lows as it consolidates. Over the past few months, SE has climbed from $80 to $120, demonstrating solid strength during this period.

• We’re taking a similar approach to SE as we are with DDOG. While we’re not looking to enter right now, we’re keeping track of its relative strength. If this momentum continues and we see a solid setup form, it could present an opportunity in the near future. For now, we're staying patient and watching how things develop.