Hi friends,
Due to the short last week, and the relative lack of volatility and noteworthy action in the markets, there are only few genuine new developments I can point to in this brief report.
As I’ve been discussing over the last couple of weeks (or rather, months), weak action and reliability of the broad US equity market has been masked by a thin rally in the popular indices of NASDAQ Composite/-100 and S&P500. These are themselves heavily cap-weighted and which price action can thus in reality be reduced to a thin rally in a few blue-chip mega-caps that had been rallying on safe haven sentiment past the March bank insolvencies and are now continuing to rally on spurious media buzz of a ‘new bull market’, consequent ETF buying programs, and general complacency and expectation of AI bringing a prosperous era to the corporate world.
If you look at a more broad representation of the risk-on market segment, i.e. the mid- and small-caps (e.g. the Russell 2000, RUT), you’ll notice that the little blip of a rally started a couple of weeks ago has retraced itself back again to lower price levels. The general market is severely lagging behind this über-crowded mega-cap trade, and strong leading stocks heralding a new market up-trend are as good as absent.
Last week, even the popular indices pulled back a little – exchange volumes were skewed by Russell indices reconstitution, but even then the Thursday rally was on weak volume, all while the broader market continued to sell off – smoke under the hood.
Few new noteworthy developments
To put it simply, a new market up-trend cannot be reliable when as good as everybody is jolly and their money already in the market. Numerous reports have come out, with their themes all describing the same scenario – everybody who wanted to be long in this rally appears to be long already, including volatility-based ETF fund buying programs. Bottom-fishing and FOMO in the need to be first. There’s few firepower left, and the rally stands on precariously thin legs, like a house of cards. Complacency and lack of opportunity stands in place where there should be general fearfulness, negative sentiment and great stocks appearing on the scene. But being first does not mean making the most money … in fact, it does not even mean making money at all.
To boot, many of the recent amateur AI/cloud/tech wonder-stocks (I guess some of them are akin a “meme stocks 2.0”) have started showing signs of distribution and topping – e.g. AI, NNOX, IONQ, PLTR, APLD, OPRA, and many more. Most of these are of low-quality, deeply buried under selling pressure and overhead supply, others are old and were played over a long ago, and many are illiquid. Those stocks leading the latest rally was not a stamp of approval for a strong market in the first place, and them now showing distribution and weakness is likely the next crack appearing in this brittle bone disease market.
However, I would not necessarily expect this market to implode soon. Though possible, the signs of complacency are extreme, and the boat can always become a little more lop-sided before it topples over. There is a never-ending lust for Big Tech at the moment, the can of recession angst is kicked down the road by fierce government spending, implied volatility of S&P500 options is near a multi-year low, and gold is selling off again (although the last word is not spoken here yet) – such rallies can be driven further and further by converting bears and covering shorts. However, the uncertainty in timing is not really important right now for me – the absence of any low-risk opportunities to speculate in is enough for me to continue to stay away from US equities right now.