Hello friends,
After becoming severely extended, the popular indices had slumped back a couple of percentage points, as expected. Since then, a small divergence has formed in the very short-term: The megacap-biased SP500 (SPX) and NASDAQ Composite (COMP) cracked but rallied back to old Highs on very weak volume (see below charts), whereas more broad and non-megacap-biased indices such as the Russell-2000 (RUT) cracked harder and did not rally at all, while averages enriched with ‘value’ and cyclicals such as the NYSE Composite (NYA) neither cracked nor rallied, sticking up like a frozen rope.
Put together, it appears that the market continues to grind up with the power of the deep value segment of the market (construction, capital goods, financials). Most of the rest of the market pulled back from a historic extension level, and of course only indices exposed to price action of NVDA, MSFT and META, mirrored by other sluggish blue-chips including DELL or ANET, levitated feebly back to old Highs.
Sounds familiar? Well, it is – these are the very names that have been driving the 2023 rally (at least on the popular indices). No unknown high-quality growth issues. No new leaders. Same old uninspiring slugs.
Leading groups remain consistent
As for the last few months, there has been a stark divergence between issues moving up on the NYSE vs. those on the NASDAQ, which again emphasizes the cyclical nature of this market – while the more NASDAQ’esque stocks chop idly or sell off, money has consistently rotated into groups including resource/energy (coal), industrials & capital goods (heavy machinery, construction equipment & materials, electronics) and defensives (insurances, large biopharma), which thus continue to slowly and erratically grind up. Nothing to lose your sleep over, as their trading character forbids speculation for anyone who manages risk properly.
Few high-quality stocks to watch
As before, you can count the really worthwhile stocks on the fingers of one hand, which should be enough of a tell for you to significantly pare back long exposure, should you have any. However, trying to make profits even in these has been difficult due to the effect of the general market on their trading character – DUOL, IOT and VRT, though not behaving very badly, are unable to lift off from low-risk entry points and run the couple hundred percent in a few months that you could expect them to in a truly healthy market, chopping back and forth – making holding on difficult while capital gains to only slowly accrue.
Moreover, you can see the late-stage behavior of this market by recent leaders such as RMBS, or SMCI – erratic and jagged digestions, started with high-volume selloffs, seldom bode well. If such bad behavior continues, the odds are high that we might be seeing those go the same way as the previously leading AEHR, ACLS or EXTR.
In short – bad action begets more of the same, and brings with it an impossibility to apply sound risk management and capital concentrations strategies to outperform the market as a stock speculator.
The odds remain against us, so my money will be working in other corners of the world – check out Japan for example … or the short options market.
So long,
TGS