When Dip Buyers Ignore the Warning Signs

Sometimes the market gets saved not because anything fundamental changed, but simply because buyers show up. That's exactly what happened Friday morning when the Invesco QQQ Trust (QQQ) was heading south before aggressive dip buying turned things around.

Here's the interesting part: none of the three major concerns weighing on the market actually went away. The stock market was weakening heading into Friday for very specific reasons, and those reasons are still very much in play. Yet buyers jumped in anyway, which tells you something about market psychology right now.

Three Problems That Haven't Gone Away

Let's break down what was spooking the market before dip buyers decided to ignore it all.

First, four Federal Reserve presidents publicly opposed a December rate cut, and that's significant. They're defying intense political pressure to ease monetary policy, which forced investors to actually look at the data. And the data? It doesn't support a rate cut. Based on existing economic indicators, a December rate cut would be the wrong move for the Fed. Now, if the Fed does the wrong thing anyway, that would likely push stocks, bitcoin, and gold higher in the short term. The market had been counting on the Fed making that questionable decision.

Second, concerns are mounting around the massive debt financing needed for AI data centers. Applied Digital Corp (APLD) became the poster child for these troubles when the data center company was forced to pay 10% interest on a bond offering. That's a red flag for anyone paying attention to how the AI infrastructure boom is being financed.

Third, market internals have been deteriorating. This is the kind of under-the-hood weakening that often precedes broader problems.

So did anything change with these three issues that would justify aggressive buying? Nope. All three concerns remain. The buying came from what you might call mindless dip buyers—investors whose entire analytical framework consists of "buy every dip aggressively."

The Hindenburg Omen Makes an Appearance

Adding to the technical concerns, the Hindenburg Omen has fired five times recently. This is a warning signal that technically oriented investors watch closely, and for good reason.

Here's what you need to know about the Hindenburg Omen. It has signaled at every major market top over the last 25 years. That's the good news if you're a believer in technical indicators. The bad news? It has also generated a large number of false warnings. So it's more of a "pay attention" signal than a "sell everything now" signal.

There's also chatter about iShares Russell 2000 ETF (IWM) forming a head and shoulders pattern, which is bearish. But that pattern isn't well-formed yet, making it suspect for now.

Real-Time Market Dynamics

Looking at Friday's trading, QQQ was weakening going into the morning session. Then mindless dip buying kicked in and saved the day. But Monday morning started with buying in QQQ that faded as sellers became dominant as the session progressed.

The VUD indicator, which measures net supply and demand in real-time, shows a mixed picture. Orange represents net supply and green represents net demand, and early Monday trading showed both forces competing without a clear winner.

A Bright Spot: Buffett Buys Alphabet

On the positive side, Warren Buffett's Berkshire Hathaway (BRK) bought $4.9 billion worth of Alphabet (GOOGL) stock. When Buffett makes a move that size, people notice.

Also worth noting: now that the government is open, a deluge of economic data is coming. And several major earnings reports are ahead, including Home Depot (HD), Lowe's (LOW), Target (TGT), NVIDIA (NVDA), and Walmart (WMT). These reports will give us a clearer picture of consumer spending and corporate health.

Magnificent Seven Money Flows

Most portfolios are heavily concentrated in the Magnificent Seven tech stocks these days, which makes early money flows in these names particularly important to watch on a daily basis.

In early Monday trading, money flows were positive in Amazon.com (AMZN) and Alphabet Class C (GOOG).

Money flows were negative in Apple (AAPL), Meta Platforms (META), NVIDIA (NVDA), Microsoft (MSFT), and Tesla (TSLA).

Early trading also showed negative money flows in SPDR S&P 500 ETF Trust (SPY) and Nasdaq 100 ETF (QQQ).

Bitcoin Struggles Despite Promotion

Bitcoin (BTC) promoters have been out in full force urging followers to buy the dip. Retail investors continue buying aggressively. But here's what's interesting: every rally attempt over the weekend and Monday morning failed, even with low liquidity conditions.

This represents a shift from the recent pattern where low liquidity allowed bitcoin promoters to push prices higher. The fact that rallies are failing even in favorable technical conditions suggests underlying weakness.

Navigating the Current Environment

So what should investors do in this environment? Consider holding good, very long-term existing positions while maintaining appropriate protection through cash, Treasury bills, or short-term tactical trades, as well as hedges based on your individual risk tolerance.

You can determine your protection level by combining cash with hedges. The high end of protection is appropriate for older or conservative investors. The low end works for younger or more aggressive investors. If you're not using hedges, your total cash level should be higher than if you were hedging, but significantly less than cash plus hedges combined.

A protection band of 0% would indicate full investment with complete bullishness. A protection band of 100% would signal extreme bearishness requiring aggressive protection or short positions.

It's worth remembering: you can't take advantage of new opportunities if you're not holding enough cash. When adjusting hedge levels, consider using partial stop quantities for individual stock positions and wider stops on remaining quantities, especially for high beta stocks that move more than the broader market.

A Note on Bonds

For those following a traditional 60/40 portfolio allocation, probability-based risk-reward adjusted for inflation doesn't favor long-duration strategic bond allocation right now.

If you want to stick with the traditional 60% stocks and 40% bonds split, consider focusing on high-quality bonds with five-year duration or less. More sophisticated investors might consider using bond ETFs as tactical positions rather than strategic allocations at this time.

The bottom line: markets are showing technical warning signs and facing unresolved fundamental concerns, yet dip buyers keep showing up. That disconnect won't last forever, which means staying alert and maintaining appropriate protection makes sense while keeping enough dry powder to capitalize on opportunities when they emerge.