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Issue #172 - Private Equity Crash And War Problems Remain

Issue #172 - Private Equity Crash And War Problems Remain
Photo by Mick Haupt / Unsplash

Trend Of The Major Indices And Market Health

Bearish headlines remained the driver of lower prices as the S&P 500 lost -1.6% for the week. Technology outperformed with the Nasdaq 100 down -1.06% and the Nasdaq Composite down -1.26%. Small caps underperformed with the Russell 2000 IWM ETF down -1.71%. And the worst performer was the equal weight S&P 500 with the RSP ETF down a whopping -2.34% on another week of heavy weekly downside volume. The S&P 500 has now closed below the important 30-week EMA (Exponential Moving Average) for the first time since the 2025 bear market. Corrections tend to bring the major indices back down to the 30-week EMA, and the current correction has now brought all of the major indices right down to this important area on the chart.

Oil was the main driver of fear in the market heading into the start of the week and a massive spike and crash in oil occurred on Monday. This crash back lower in oil led to a massive bounce in the major indices that could have been the start to a correction bottom this week. Volume in many of the major indices was massive on the upside on Monday, and big upside volume in the major indices is discussed in the Correction Playbook as commonly occurring around correction bottoms. And technology outperformed strongly on Monday through Wednesday this week which was a very positive sign for the market.

But bears clawed back control of the market starting on Thursday with a gap down on heavy volume in the major indices. And instead of seeing a bounce off of that gap down, the market closed the day at the lows of the day. Then on Friday another weak bounce early in the day led to bear control by the end of the day and another close near the lows. So despite some strength early in the week it gave way to selling pressure with the big turn lower on Thursday.

The Iran War and oil price fears continue to be a negative force on the market, and there is also a continued private equity asset manager crash going (discussed in the Sector Review) that is bringing down the financials sector. A resolution to at least one of these negative drivers would help increase odds of a correction bottom occurring.

The Timing Model is therefore continuing to remain negative as the poor overall market is not letting the best stocks thrive yet. The leaders of the next cycle do largely appear to be coming out which is the most positive sign in this market. There's some new Stage 2 breakouts working, but there's not an explosion in them quite yet which often occurs around correction bottoms. Breadth continues to get more and more favorable for the bulls as the percentage of stocks above the 50 day and 20 day moving averages in the S&P 500 closed at 32.4% and 23.2%. The VIX did have a weekly reversal but it isn't as definitive as it could be, and it remains above the 10-week EMA. Now is a good time to stay engaged as big opportunity has been created once again in the stock market, but also patiently waiting for a better signal a bottom is in place to trade more aggressively to the long side.

Sector Review

Asset Managers and Homebuilders (GPZ, ITB) - asset managers are now well into a sharp Stage 4 downtrend but unlike Bitcoin and software (IGV), there isn't a strong sign of a potential bottom being in place yet. GPZ sold off on its heaviest weekly downside volume ever this week and lead asset manager BLK traded its heaviest weekly downside volume in two years. Besides asset managers the homebuilders are also under big selling pressure and are in a sharp move lower, and both sectors are being impacted by a real estate downturn and recently rising interest rates.

Financials (XLF, KRE) - financials are also under selling pressure and XLF is now in Stage 4 having broken a key support level. It appears that a bottom in the financials would be an important event to put in a correction bottom for the overall market given the massive selling pressure, so that would be something to look for on the weekly chart over the next few weeks.

World Stocks (EFA) - with the U.S. dollar rallying strongly world stocks sold off on huge volume for a second consecutive week. In just two weeks the EFA ETF has corrected about -10%, which shows how fast a market can move from the top to a big correction, especially when it is extended from long term moving averages.

Cryptocurrency (Bitcoin, Ethereum, Solana, Hyperliquid) - cryptocurrency continues to exhibit Stage 1 action by not making new lows, especially with the U.S. dollar rallying strongly. Hyperliquid which is showing powerful relative strength completed a Stage 2 breakout and continues to be the lead major cryptocurrency.

Drones, Space, and Uranium (DRNZ, ARKX, URA) - drones continue to show strong relative strength but are being held back by a weak overall market. The same goes for space and uranium stocks, which continue to outperform the S&P 500 but remain held back by this correction for now.

Solar (TAN) - solar stocks had a nice bounce and outperformance this week with the TAN ETF retaking the 10-week EMA. Lead solar stock NXT completed another Stage 2 breakout and is right back at its highs with no overhead resistance.

Semiconductors (SMH) - semiconductors had very strong relative performance this week and the SMH ETF had its heaviest weekly upside volume since the April 2025 bear market bottom. Semiconductors now look much better and the breakout in MU is helping move the sector higher.

Bonds (TLT) - bonds continue to be in a sharp move lower on heavy volume which is putting pressure on asset managers and homebuilders. The TLT ETF could start to move into Stage 4 if it continues lower next week.

Stage 2 Breakouts

One attractive aspect to the Stage 2 breakouts this week is multiple stocks have no overhead resistance. The artificial intelligence computer hardware stocks led by SNDK were a top sector when the market had an explosive rally starting in September 2025. They then held up well during the November 2025 correction and had another major move higher before the current correction started in late January 2026. Now these stocks might be getting ready for a blowoff move to the upside and could help tech lead this market out of the current correction.

There's now been four out of the last five weeks where leading stocks have emerged starting with FSLY in mid-February. These few select leaders have continued higher in the face of the current correction, and unless the market really spirals to the downside, its unlikely these new leaders are going to make another low. So although these leaders have been held back so far by the overall market, once the pressure comes off and the S&P 500 becomes less hostile there should be some big moves higher in these leading stocks.

Best Stage 2 Breakouts

SNDK, WDC, and NBIS are artificial intelligence stocks with Stage 2 breakouts on heavy volume. SNDK is a major leader of this cycle and institutionally highly liquid, and has no overhead resistance.

MU is a semiconductor stock with a Stage 2 breakout on heavy volume and no overhead resistance, and is an extremely liquid institutional stock.

LWLG and MOS are basic materials stocks with Stage 2 breakouts on heavy volume.

NXT is a solar stock with a Stage 2 breakout and no overhead resistance.

PURR is a cryptocurrency stock with a Stage 2 breakout on its heaviest weekly upside volume ever and no resistance.

The following are the best Stage 2 breakouts from the past week:

SNDK, MU, WDC, NBIS, LWLG, MOS, NBIS, NXT, PURR

All Stage 2 Breakouts From The Past Week

Artificial Intelligence stocks - IREN, NBIS, SNDK, WDC, STX

Solar stocks - NXT, ENPH

Semiconductor stocks - HIMX, MU, NVTS, STM

Tech stocks - DDD

Consumer Cyclical stocks - LOCO, RERE, WOOF

Healthcare/Biotech stocks - ACRS, DYN, EDIT, LNTH, NERV, RLMD, TENX, VYGR, ZVRA

Cryptocurrency stocks - PURR

Consumer Defensive stocks - LAUR, UNFI

Chinese stocks - KC, NIO

Basic Materials stocks - LWLG, MOS

(Note: Stocks in bold broke out on 2x average weekly volume or higher for the week)

Stage 2 Breakout Pullbacks

Last week's probes into the market in the Stage 2 Breakouts Pullbacks section produced two winning trades (FSLY and CRCL) and four losing trades (YOU, SPHR, FIGS, RNG). FSLY and CRCL had great follow through but were in an exclusive group of stocks that worked well in the hostile environment this week. So overall only the very best stocks are starting to work, which means its a good idea to continue to trade smaller until more traction is gained on the long side and more stocks start following through higher. On the Best Stage 2 Breakouts lists half of the stocks followed through higher from last week, but just 40% of all the Stage 2 breakouts. In healthy environments 55-70% of Stage 2 breakouts tend to continue higher which creates a win rate with an edge when the market is healthy.

Fintech stocks - CRCL

Artificial Intelligence stocks - FSLY

Drones stocks - AMPX

Space stocks - RKLB, LUNR

Long Term Trades Update

NXT continues to be the solar sector leader and largest component of the TAN ETF. Solar just started its Stage 2 uptrend back in July 2025 so its not even a year old yet. The solar sector has held up well during both the November 2025 and the current correction as it has outperformed the S&P 500 during both corrections. And TAN moved higher on an increase in volume this week.

NXT looks like its ready to continue higher and with no overhead resistance and could be set for another major move higher once the current stock market correction is over.

Long Term Trades

Add To Position - NXT

Summary

The stock market continued to move lower as the Iran war and spiking oil prices and a sharp move lower in the financials sector led by asset managers is putting pressure on the overall market. The bulls tried to put a bottom in early in the week but bears took control after the gap down on heavier volume on Thursday. The S&P 500 has now finally closed below the 30-week EMA for the first time since April 2025, and correction bottoms regularly occur below that moving average. The bright spots in the market include multiple leading stocks which are acting well and not following the market lower, and technology is starting to outperform the S&P 500 again. Instead of breaking down semiconductors are starting to act strong again and outperform the S&P 500. Other sectors resisting the decline include drones, space, and uranium which are outperforming the S&P 500. The VIX tried to reverse this week but didn't have a clear weekly reversal, and is still above the 10-week EMA (see the Shorting Guide for more information on the VIX and that key moving average). Breadth continues to get more washed out which is getting very favorable for bulls as most stocks have now had a correction in the S&P 500. The bear market in the financials and asset managers is a key area to watch, if those sectors put in a weekly reversal that will greatly increase odds of a correction bottom being put in. While the market didn't put in a definitive bottom this week more new potential leaders broke out, so its a good time to probe the market with light long exposure and see what continues to work. A correction bottom continues to get closer but patience is still required until that occurs.

Education

Besides weekly commentary the education portion of this newsletter continues to grow.

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Published by:

Justin Smyth