Catching the Knife Safely: The Rules of the Pullback Buy

 

One of the oldest adages in growth investing is to "buy the pullback." In a strong bull market, buying elite names when they take a breath offers an entry point with a much tighter risk-to-reward ratio than chasing a vertical breakout.

But anyone who has traded a high-beta tape knows the terrifying reality: today’s orderly pullback can easily become tomorrow’s elevator shaft. Distinguishing between a routine pause in a structural uptrend and the first leg of a major institutional distribution campaign is the ultimate test of a fund manager's discipline.

At Worch Capital, we don't guess. We rely on a strict, technical framework to determine when to step into the bid, and exactly why pullback buys require entirely different position-sizing rules than structural breakouts.

The Three Signals of a Structurally Sound Pullback

When high-flying leaders pull back, we are not looking for "cheap" prices; we are looking for the footprint of institutional support. A healthy pullback should exhibit three distinct technical characteristics:

• Decreasing Volume on the Down Days: This is the most crucial variable. A normal pullback is caused by a temporary lack of buyers, not an influx of aggressive sellers. If a stock drops 5% on volume that is 40% below its 50-day average, it indicates the big money is simply stepping aside, not dumping shares.

• Clustering at Structural Moving Averages: Elite momentum names should defend their short-term structural baselines. We look for a constructive "touch and go" or a brief shakeout that immediately recovers at the 10-day exponential moving average (EMA) or the rising 21-day EMA.

• Prior Breakout Resistance Acting as Support: We check the previous major base. A healthy stock will often map out a "return to the scene of the crime," pulling back to test the exact horizontal price line it previously broke out from. If old resistance turns into new support on low volume, the tape is structurally sound.

Pullback vs. Deeper Correction: The Fork in the Road

How do you know if a dip is a routine buy or the beginning of a deeper 20-30% market correction? The truth is, you don't know immediately. The market is an unfolding movie, not a still photograph. However, the tape gives clues through its character:

Technical Variable	Healthy Bull Market Pullback	Beginning of a Deeper Correction
Index Behavior	Index holds its rising 21-day EMA.	Index violates 21-day EMA on heavy volume.
Leadership Action	Leaders pull back orderly while others break out.	Market leaders experience "gaps down" on massive volume.
Market Breadth	The percentage of stocks above 50-DMAs stays stable.	Internal distribution accelerates across all sectors.

The Execution: Why Pullbacks Demand Smaller Sizing

Because you cannot predict with 100% certainty whether a pullback will hold or fail, your risk management rules must adapt. This is why our playbook dictates a vital rule: We play smaller on pullback buys than we do on breakout buys.

When you buy a stock clearing a fresh, tight consolidation on a volume expansion (a breakout), the market is giving you immediate validation that demand is exceeding supply right now. The trend is actively accelerating.

When you buy a stock on a pullback, you are fundamentally catching a declining asset. You are buying anticipation, not confirmation. Because you are stepping in front of downward momentum, the risk of an "air pocket" is inherently higher.

• The Pilot Position Strategy: Instead of scaling in with a full 10% portfolio position, we initiate pullback buys using small 2.5% to 5% pilot positions.

• The Stop-Loss Anchor: We keep our stops incredibly tight, often just below the intraday low of the support test. If the support level snaps, we take a minor scratch on a small position. If the pullback holds and the stock begins to turn back up, we can always add to the position on a breakout of the new, shorter-term downtrend line.

The Bottom Line

Pullback buying is an invaluable tool for building an equity curve, but it must be executed with extreme humility. By looking for low-volume support tests, utilizing strict trailing stops, and scaling down our initial position sizes, we ensure that we stay nimble enough to capture the market's gifts without getting crushed when the structural rubber band finally decides to snap.

The Divergence Trap: When the Index Lies and the Tape Tells All

 

In the world of growth equity, a rising Nasdaq is usually a reason to celebrate. But as we navigate this mid-May tape, the headline numbers are telling a very different story than the individual stocks. We are witnessing a massive breadth divergence—a scenario where the "Generals" are charging up the hill while the "Soldiers" are quietly retreating to the barracks.

For a long-short manager, this is one of the most dangerous psychological environments. If you only look at the index, you feel like you're missing a party. If you look at your P&L, you feel the friction.

The Math of the "Thin" Rally

The data behind this divergence is striking. While the Nasdaq 100 has pushed toward the psychological 30,000 mark this week, the foundation underneath is thinning out:

• The 50-Day Fatigue: As of today, only 49% of S&P 500 stocks were trading above their 50-day moving average. In a healthy, broad-based bull market, we want to see that number closer to 65-80%.

• The New High Gap: While the index prints fresh all-time highs, the number of individual stocks making new 10, 20, and 50-day highs has been steadily declining since mid-April.

• Sector Isolation: It has become a two-sector market. Only Technology (XLK) and Real Estate (XLRE) have managed to sustain new highs this month.

The Binary Endgame: Catch Up or Succumb

When a market becomes this bifurcated, there are ultimately only two outcomes. We are at a "fork in the road" for the current regime:

1. The Expansion (Catch Up): The "Soldiers" finally hear the bugle call. Buying pressure rotates out of the mega-cap AI leaders and into the broader market, lifting the 50% of stocks currently stuck below their moving averages. This is the "soft landing" for the rally, where breadth expands to support the index's lofty valuation.

2. The Gravity (Succumb): The weight of the 50% of stocks in internal distribution finally becomes too much for the leaders to carry. The "Generals" (Semis and AI) eventually succumb to the surrounding weakness, and the index corrects violently to meet the reality of the average stock.

Why This Matters for Your Portfolio

A rally without breadth is like a house built on toothpicks. It looks great from the outside, but it can't handle a heavy wind.

• The "Air Pocket" Risk: Because the index is held up by so few names, any weakness in those leaders can create an "air pocket" where the index drops rapidly.

• Respect the Friction: If the Nasdaq is up 1% and your long positions are flat or red, listen to the tape. Your P&L is telling you that the risk-reward for broader growth is currently poor.

The Game Plan: Surgical Exposure

At Worch Capital, we don't fight the index, but we don't ignore the divergence. We are moving stops to break-even on names that aren't showing immediate "traction." We avoid the "laggard trap", buying stocks just because they are "cheap", and remain perfectly comfortable sitting in cash. We are waiting for the market to prove which of the two outcomes will win: will the soldiers join the fight, or will the generals finally fall?

A Market of Stocks: Navigating the "Climactic" Separation

  

 

It is often said that we trade a "stock market," but in reality, we are currently navigating a market of stocks. The distinction is critical. Even as the headline indices flirt with all-time highs amidst a backdrop of rising oil and geopolitical tension in Iran, the surface performance is a tale of extreme "Haves" and "Have-Nots."

At Worch Capital, we are paying close attention to the extreme concentration in the semiconductor and AI space. While the long-term fundamentals of AI are vastly superior to the dot-com era, the technical velocity has reached a point that is, in some metrics, even more extreme than 1999. 

Better Than 1999? The Math of a Blow-Off

The data from BTIG’s Jonathan Krinsky provides a sobering reality check. In the year leading up to the March 2000 peak, the top 10 Nasdaq 100 stocks averaged a 622% gain. Today, the top 10 names are up an average of 784%. We are witnessing a level of verticality that exceeds the most parabolic moment in modern market history.

Consider this: during the height of the bubble, Qualcomm’s best 52-week run was 2,600%. Today, we see names like Sandisk (SNDK) up nearly 4,000% over the last year. While the 1999 "bubble" was built on eyeballs and promises, today’s move is built on actual data center demand and memory shortages. However, price eventually moves beyond even the best fundamentals. A 25-30% correction in the SOX (Semiconductors) would only bring the group back to its 50-day moving average. That is not a "crash", that is a routine return to the mean after an exhausted move.

The Tech Monopoly on Performance

The "Haves and Have-Nots" theme is best illustrated by sector breadth. In May, only one S&P 500 sector ETF has made a fresh 52-week high: Tech (XLK). Out of 11 sectors, the majority peaked months ago, some as early as January.

This creates a high-stakes environment for the long-short manager.

• The Risk: If the Semis hit a "swing high" today on the back of positive earnings and Middle East de-escalation, can the "Have-Nots" (Financials, Energy, Staples) pick up the slack?

• The Reality: Historically, when the primary leadership engine stalls, the rest of the market usually follows it into a period of digestion rather than rotating into laggards.

The Bottom Line

At Worch Capital, we respect the trend, but we acknowledge the math. We are not calling for a 2000-style wipeout, but we are tightening stops and avoiding the urge to chase the "climactic" laggards of the semiconductor space.

In a market of stocks, your job is to find the winners, but your duty is to recognize when those winners have become a crowded trade. We stay light, we stay alert, and we wait to see if the "rest" of the market is ready to step up if the AI leaders finally take a well-deserved breath.

The Momentum Dilemma: When the "Rubber Band" Snaps in Growth Equity

 

 

In a runaway bull market, the hardest battle isn't finding winners, it's managing the exit. We are currently seeing a historic extension in the semiconductor space. As Jonathan Krinsky at BTIG recently noted, the Philadelphia Semiconductor Index (SOX) recently completed an 18-day winning streak, a feat not seen in decades. While the long-term AI thesis remains the "North Star," the short-term technicals are screaming that the rubber band has been stretched to its limit.

When momentum is this high, you face two equal and opposite fears: the fear of blowing up by chasing the top, and the fear of exiting a massive winner too early.

The Reality of the "Island Top"

Krinsky’s commentary on the GSCBHMOM (GS High Beta Momentum) and the XSD (Equal-Weight Semis) highlights a specific technical danger: the Island Top. This occurs when a group gaps higher, stalls, and then gaps lower, leaving a "cluster" of price action stranded above the rest of the trend.

Historically, when momentum loses more than 4% in a single day while sitting near 52-week highs, the forward returns become a coin flip. We saw this during the "Yen Unwind" in July 2024 and the "DeepSeek" shock in January 2025. In both cases, the initial snap was a warning that the "easy money" phase was over and a period of 15-20% digestion was likely.

Strategy: How to Handle the "Blow-Off" Top

At Worch Capital, we don't try to time the exact peak. Instead, we use a mechanical framework to protect capital while staying in the game:

1. The "Pilot" Trim: You don't have to sell the whole position at once. When a stock gets 30-40% above its 200-day moving average (as the SOX recently did), we take "tactical profits" on 1/3 of the position. This creates a "house money" psychological buffer.

2. Respect the Breakout Point: Krinsky mentioned that XSD could retrace 17% back to its breakout point. This is normal market behavior. We move our stops up to just below the previous breakout level. If the "Island Top" is real, we want to be out before that 17% haircut happens.

3. Avoid the "Revenge" Buy: When momentum snaps 6% in a day, the urge is to "buy the dip" immediately. But as history shows (3/13/00 or 4/27/10), the first snap is often just the beginning of a regime shift. We wait for volatility to contract to return before adding new capital.

The Bottom Line

Runaway markets are meant to be enjoyed, but they must be respected. The goal is to capture the "meat" of the move, not the final tick. If the rubber band is snapping, your priority shifts from "Alpha Extraction" to "Downside Protection." We stay light, we honor our stops, and we let the laggards chase the ghosts of the old high.

Decoding the Nasdaq Bounce: Separation, Not Correlation

 

 

The recent rally off the lows has been a masterclass in market character. For the undisciplined trader, a green Nasdaq screen looks like a blanket invitation to buy everything. But for those of us running a long-short growth strategy, the tape is telling a much more nuanced story. This isn't a "rising tide lifts all boats" scenario; it is a period of intense separation.

Understanding what is working and more importantly, what isn't, is the key to determining if this is a sustainable regime shift or simply a tactical bounce in a broader correction.

What is Working: The "New Leadership"

The names leading this charge are not the laggards of 2025. We are seeing institutional money flow into two specific buckets:

1. High-Relative Strength (RS) Growth: We are watching stocks that barely corrected 10% while the Nasdaq was down 15%. These names held their 50-day moving averages and are now hitting all-time highs while the index is still struggling with overhead supply.

2. The "Earnings Winners": The market is rewarding growth. Companies that reported "beat and raise" quarters are being "bought on the gap," showing that big money is willing to pay up for certainty in an uncertain macro environment.

The "Market Score" Reality Check

At Worch Capital, our Market Score model is currently flashing a green light. Price action is improving along with market breadth. However it remains narrow as this suggests that a few names and themes are doing the heavy lifting while the median growth stock remains in a choppy range.

The Strategy: Measured Aggression

We aren't chasing the index. We are looking for the names that showed the most resilience during the lows.

• Pilot Positions: We are entry-testing with small sizes to see if the market gives us that "instant feedback" of profit.

• The Stop-Loss Anchor: We maintain our strict 1% total equity risk. If a "leader" fails to hold its breakout level, we exit immediately. The Nasdaq rally means nothing if your individual holdings aren't trending.

The Bottom Line

This rally is a "show me" move. The market is proving who the new leaders are, and more importantly, who the bag-holders will be. We stay focused on the stocks that are "outperforming on the way up" and "ignoring the way down."

What's in store for 2022

As we embark on 2022 many market pundits are putting out their yearly predictions. We always find these more entertainment and theater rather than actual advice because the honest truth is, no one has any clue what the future holds and the market doesn't care about my opinion. Frankly there are always issues to worry about: Omicron shutdowns, new variant, supply chain glitches, labor shortage, school closures, higher inflation, rate increase cycle, Mid term elections, military conflict, etc. Our investment philosophy isn't predicated on predicting the future but rather reacting to current data. We use current and past data to help shape a thesis for potential outcomes in a scenario analysis manner. Then when events and conditions change we adjust our positioning and risk accordingly. The old adage sums it up perfectly, "the only constant in life is change".

With that said, to look out to next year we need to first assess what has actually taken place in real time. 2021 provided great returns across the asset class spectrum for everything except gold and treasuries. Jurrien Timmer from Fidelity sums this up in his table of investment returns.

Even as the general market provided health returns there was plenty of churn under the surface. Remarkably, the average Nasdaq drawdown from YTD highs is a whopping -42%.

Cathie Wood has taken a lot of heat this year as her Ark funds have under performed. But a simple ratio chart of the ARKK ETF to the SPY shows how dramatic the selling has been in high valuation growth names. ARKK peaked in February and has drastically under performed the S&P since then. Currently it is more than 50% of it's YTD high. 

 

Most of the destruction in high beta growth can be attributed to the pivot from the Federal Reserve to speed up the tapering process to fight inflation they let get out of control. A tweet from Puru Saxena highlights how expensive stocks have lagged all year when plotted against the Fed's balance sheet.

This begs a bigger question. What is the impact from QE on the markets. Clearly quantitative easing has been a tailwind to the S&P. However, the reversal of QE (tapering) that reduces liquidity in the economy seems to be a headwind. The following two charts from William O'Neil touch on this.

On top of that the Fed's actions have historically triggered greater volatility. 

 

The following two charts increase the likelihood for the potential for a more volatile environment next year. Low volatile years like 2021 are historically followed by more volatility.

The presidential cycle doesn't do any favors either. The first three quarters are weaker than normal heading into the mid term elections.

 

One of the biggest market concerns is the rate of inflation and the pace of interest rate hikes from the Fed. However, should we be scared of rate hikes? Bespoke has great data on this. What I found most interesting was, "as shown, the broad market tends to do poorly in the first three month of a tightening cycles over recent year, bu longer-term that's a buying opportunity as forward returns average 7.1% (86% positive) over the first six months follow a rate hike."

Ken Fisher validates this theory that the market shouldn't be spooked by rate hike cycles. Outside of the mid 70's stagflation, equity returns have been positive during rate hike cycles.

Some more data points in the bull case shows how strength begets strength. One of our favorites Ryan Detrick shows what happens after big up years in the S&P 500. The average return next year is 11.6%.

Another interesting stat lies in the fact that 2021 was a unique year. It was only the 5th time in history going back to the 1920's that the S&P finished up double digits three years in a row. We looked at what happened the 4th year after three straight double digit years. The returns surprised us.

Year	Yearly Return
1942	12.43%
1943	19.45%
1944	13.80%
1945	30.72%
1949	10.46%
1950	21.56%
1951	16.46%
1952	11.78%
1995	34.11%
1996	20.26%
1997	31.01%
1998	26.67%
2012	13.41%
2013	29.60%
2014	11.39%
2015	-0.73%
2019	28.88%
2020	16.26%
2021	26.89%
2022	?
Average 4th Yr Returns	17.11%

In conclusion, the data points to a mixed bag and has something for everyone. The bears can highlight tapering and volatility while the bulls can point to continued momentum. Our best guess is the first half will be more volatile than normal with multiple pullbacks. But as the supply chain gets worked out after Omicron dies down that should help inflation ease. Tapering should be done by the first quarter and we should have the first rate hike behind us sometime in the first half. That could set the stage for a second half rally as pent up demand comes on board and a strong finish once the Midterms are behind us. As I said in the beginning, the market doesn't care about my opinion. That is why we prefer to see how the tape reacts to new information and we'll adjust accordingly. 

Happy New Year!

What to do when out of sync with market?

After a banner year last year for growth and momentum, 2021 has been a historically frustrating year. With the S&P up double digits again YTD it is surprising that certain sectors are drastically underperforming. So what do you when your strategy is out of favor while the general market doesn't show any signs of weakness? If you invest long enough all investors and managers will go through difficult periods. The key is to know your strategy in and out and know when it is time to be aggressive and when it is time to be more risk adverse and selective. If we take a quick look at some data and statistics we can get a better idea of what is being rewarding in this environment.  

Lets take a top down approach and look at which asset class is leading. We can see that commodities are in the lead as bonds lag drastically. 

 Commodities have been on fire.

If you want a reason for why commodities are surging we can look at the recent March PPI prices:

• Plywood (construction): +53 percent vs. last year
• Cold rolled steel (durable goods): +75 pct
• Copper (construction, durable goods): +43 pct
• Corn (food, animal feed): +44 pct
• Wheat (food): +32 pct

One of the big surprises of the first quarter was the historic rise in interest rates. The 10-year treasury note started the year around 90 basis points roughly doubling to 175 basis points. Albeit from a very low starting point, the 10-year yield put in the biggest 40-week rise in rates, by a long shot, going back 50 years. Below shows how dramatic the rise in yields has been YTD across duration's.

 

The increase in yields put the biggest pressure on high valuation growth stocks. Many growth stocks are in bear market territory even with the general market positive on the year. This bifurcation is the exact opposite of what worked last year. Toni Sacconaghi, a longtime technology analyst at Bernstein, encapsulated the dynamic in a fascinating piece of research. “He points out that, in 2020, investors seemed to be buying techs almost because of their high price tags. In fact, if you divide the tech universe into quintiles ranked by price/earnings ratios, the returns were lowest for stocks with the lowest valuations—and highest for those trading at the loftiest multiples. The average tech issue outpaced the broad market by 28 percentage points last year, but those in the top quintile outperformed by 60 percentage points. Writes Sacconaghi: The more expensive a stock was in 2020, the better it generally fared. But investor behavior is shifting. Tech shares have underperformed the broad market by about four percentage points this year, according to Sacconaghi. The most expensive names are running 10 points behind and the stocks at the other end of the valuation spectrum—the cheapies—have beaten the market by about 6%. In short, what went up is indeed starting to come down, he writes.”

The correction in high quality growth names will set up future opportunities, as YTD is a tale of two tapes and the opposite of last year. There was a huge rotation out of growth and into value, small caps, and the reopening theme. Below is a good representation of the shift out of growth and into value. It is a ratio chart of the VUG (Vanguard Growth ETF) to the VTV (Vanguard Value ETF). When it is rising, growth is outperforming which we see with the historic rise last year. This trend started to stall out in the fourth quarter of last year and broke down in the first quarter of this year as money rotated away from high growth and into more value centric ideas. It now has the look of a big head and shoulders top with a retest failure.

When we drill down to market capitalization we can clearly see smaller caps are outpacing large caps. 

Lastly is a list of sector returns year to date. When beaten down energy and financials are leading the market that is not a ripe environment for growth. The current market clearly favors cyclicals and commodities. 

Now that we have an idea what is working and what isn't we can look at a few data points that gives some future potential. A few studies from Ryan Detrick show conflicting possibilities. Even though we are entering the worst 6-month stretch of the year, based on some recent data the future looks brighter. 

 

A second tweet from Ryan Detrick shows how this current bull trend could be getting close to exhausting itself in the short term. 

As we enter the sell in May and go away theme for the next six months, one data point helps back up this case. A recent note from DataTrek research shows "the latest Investment Company Institute money flow data for long term mutual/exchange traded fund flows paints a less optimistic picture. We now have data through April 28th (essentially month end); here’s how it looks:

• Fund investors redeemed $17.8 bn from US equity funds in the final week of April, enough to flip whole-month flows negative to the tune of -$7.8 bn.

• There were also $4.6 billion in non-US equity fund redemptions, but April’s total is still positive by $17.6 bn.

• Fixed income fund flows, by contrast, were strong last week (+$19.2 bn) and April as a whole looks like inflows will total $76.2 bn. That’s the best month for this asset class since January’s $93.8 bn of inflows.

• Commodity fund (mostly physical gold) inflows last week were slightly positive (+$119 mn) but April’s outflows still total $1 bn.

Takeaway: it’s just one week of data, but the sudden and sizable reversal in US equity fund flows after 2 solid months of inflows isn’t something we can just dismiss, especially given the money market fund data. Perhaps investors are starting to sell positions with large capital gains (those would more commonly be in US vs. non-US equities) now that the current Administration’s tax plan is out. Perhaps stimulus money going into US equity funds has run its course. Perhaps late April’s sales were just rebalancing. Perhaps it’s all of the above. One thing is for sure: it will be much easier for US equities to continue their rally if flows turn positive again. We’ll know soon enough."

The question is what do we do when our strategy is out of favor. I have been in the business long enough to know that styles ebb and flow with market cycles. Not one strategy dominates every market year in and year out. Where most amateur investors fail is they get complacent and chase the next hottest investment product. However, if you know your methodology and trust the process you have confidence that opportunities will eventually present themselves. Sometimes the best trade is to do nothing while the hardest trade is to keep powder dry while reducing risk sitting patiently for asymmetrical bets to turn up.

A quote from Dr. Brett Steenbarger sums up how a trader should react under uncertainty, "that is where meditation and self-control techniques learned through biofeedback can be very helpful. If market volatility has picked up, there will be plenty of movement to participate in. The key is standing back, slowing yourself down, consulting the data and then looking for opportunity. Because the volume and volatility are coming from large participants in the marketplace, their behavior can create significant directional opportunity. You just want to be at your mindful best at those times so that you size positions properly and don’t let the excitement lead to overtrading. A lot of money can be lost quickly under chaotic conditions."