After two weeks of well-defined range-bound trading in the S&P 500, it’s tempting to just say that U.S. stocks are headed for a big move, one way or the other – that’s what I thought was going to happen last week – but instead we tried to break out, failed, and stayed within the range. But now that Nvidia (NVDA) dragged the S&P to a 10-day low on Tuesday, it’s probably more useful to say stocks are likely starting some sort of downtrend. 

It’s an even clearer case for the Nasdaq, which peaked on July 10 (the green light for stocks on my Risk Radar came off the next day). We’re now making steady lower-highs and lower-lows in the Nasdaq as air comes out of the Artificial Intelligence trade. Other sectors, mostly defensive ones like staples, healthcare, and utilities – but also banks – are doing well. Catch is the same as it was day one of the rotation that began in July: the math is much less favorable at the index level with these as your leaders.

As far as I'm concerned, a sustained drawdown or bear market in the A.I. trade makes plenty of sense until we see if this technology is actually compelling people to go out and buy expensive new devices, namely the next iPhone. 

So that leaves us with the macroeconomic trade driving the market, and that remains hotly debated. The whole concept of rotation is basically an early-cycle or mid-cycle refresh trade, but that doesn't line up with very late-cycle indicators like the Sahm rule for rising unemployment, and yield curve un-inversion that usually happens when the Fed has to cut to backstop the economy. Considering the last employment report was the domino that led to VIX 65, it seems very reasonable that volatility should be elevated going into Friday's report. 

The odds of 50 basis points in September are still very elevated (above 35%), and the market doesn't like it. That should be a clear message about how real the economic concern is at this point; how high the stakes are. Combined with the seasonal history of September being a bad month, Tuesday was about the worst start bulls could have.

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