EB Daily Market Report - Thursday, February 26, 2025
Just a few quick observations on the market today:
NVDA Earnings
NVIDIA Corp (NVDA) did beat its quarterly revenue and EPS estimates and initially gapped higher. However, it's been unable to sustain that early upside move and many of the AI-related stocks are down in sympathy. Semiconductors ($DJUSSC, -3.04%) are among the worst-performing industry groups as a result and weighing on technology (XLK, -1.26%), one of three sectors in negative territory - along with consumer discretionary (XLY, -0.33%). The XLY opened higher, then reversed lower. Meanwhile, consumer staples (XLP, +0.25%) opened lower, then reversed higher. More on this bearish rotation below.
Rotation
This is probably the biggest issue in the market right now. Money is rotating heavily in "risk off" fashion and it can be seen quite clearly on this chart:
Gap support from mid-January is 5937.34. We have now tested this level 4 times, 3 times in the past 3 days. If we lose this support on a closing basis, selling very well could escalate once again. That would NOT be a good thing with the Volatility Index ($VIX) already elevated (see below).
Perhaps the worst part of the above chart is the constant and consistent drop in the XLY:XLP ratio. Even the benchmark's recent attempt to rebound has been burdened by a weak XLY:XLP ratio.
Volatility ($VIX)
Very swift, compulsive selling can happen when the VIX moves through 20. I've discussed this many times in the past. So it stands to reason that if gap support on the S&P 500 is lost at the same time that the VIX crosses and closes above 20, the risk of a significant short-term drop increases significantly. Check out the VIX right now:
The green arrows show that S&P 500 bottoms have been marked when the VIX hits the 20-22 zone. Will that be the case this time?
In 2025, the selling has ended each time we've attempted to close above 20 on the VIX. If we see a close above 20 and/or a move through 23, we should recognize that risks have increased considerably. That doesn't mean we're about to collapse, it just means that risks are rising. That can mean different things to different folks. I believe long-term "buy and hold" types of investors can ride this period of weakness out and that we'll eventually set new all-time highs later in the year. It'll be dicier and much more emotional for short-term trades. Cash is your friend during a market decline.
I always want to emphasize that I'm not a Registered Investment Advisor (RIA), and neither is EarningsBeats.com nor any of its employees, so please understand this is just our thoughts on the market and should not be construed as recommendations or advice. Please consult your own financial advisor before making decisions to buy or sell securities.
Happy trading!
Tom