Hello everyone –
Rising yields and a strong USD are still crushing equities, with both seen by some people as invincible trends and by others as severely overbought – how high can ‘high’ go? No one knows – the rise could end soon, or consolidate and continue moving, but they always last as long as the majority of market participants doubt them, and in this case the underlying torrents of global money into a high-rates environment.
And rising rates are usually a problem for equities. Should we be expecting a consolidation in the bond dumping massacre? It’s very likely (note the last June/July consolidation). Does that mean it cannot go any higher? Of course not.
General market
Friday, there was a report on potentially less severe rate hikes in the next half a year; immediately sparking a relief rally from a strongly oversold intermediate-term trend state. Anything is possible, however extrapolating what one or two FOMC members think might be going out on a limb. I’d rather focus on what the market is ACTUALLY doing and telling me.
For the next couple of weeks, all bets are off. A strong driver of movement, either up or down, will be the incoming earnings reports, especially from the large caps with heavy index weightings (the notorious FAANG/MAANG). You can hate on them, but they pretty much ARE the indices.
Whether we are halfway through another bear leg in the indices, or have already finished it off, judging from the strong intermediate-term oversold state we’re in, I could see an earnings-season-driven temporary and tradeable relief rally happening soon.
Perhaps it already is the one that started 2 weeks ago. In such a rally, the NASDAQ and SPX are likely to test their 50DMA but probably won’t go across the 200DMA or their down-trend lines drawn across the rally Highs from the start of the bear in November.
The problem is, I just can’t find enough leadership currently to justify that this rally could turn into a sustainable uptrend…yet. However, given the environment we’re in (still high levels of complacency), the earnings season could also lead to a meltdown. No one knows for now, but one doesn’t have to know – one just has to watch and decide.
Market Technicals
Look at that volume spike Friday on SPX. Not world-shattering, but definitely better than NASDAQ, or any other up-day in the last few months.
The dynamics of the rally attempt starting October 13 and the action from last Friday is so far confirming that the short-term trend has turned, on both NASDAQ and SPX; specifically, the index rally on SPX was admirable, scoring 2.4% upside with 25% above average volume.
NASDAQ and SPX are both well below their 50DMA and will need to pop above it for a first indication of change in intermediate-term trend. The indices are now rallying into an area of overhead supply from the June/July Lows, thus we are in a decision zone that the earnings season will likely resolve … in either direction.
Until the downtrend is broken, this market is still in a long-term downtrend. To lift it into a new uptrend, I would need to see a broad rally across resistance areas, driven by high-quality stock leadership. So far, mid-caps have been leading the current rally attempt, with S&P 400 and Russel 2000 diverging and by a thread not undercutting their respective June Lows, while NASDAQ + SPX + DOW all made lower Lows.
This makes for a spicy narrative but does not give any actionable insight for a growth stock speculator. We need to know what is leading the rally so far, and we’ll find out if we go down to a more granular level.
A new rally?
The guys over at investors.com put a lot of weight on technical triggers to gauge new uptrends – specifically what is dubbed a “Follow-Through Day” leading to a “Confirmed Uptrend”. Last Friday, there was one of those. As much as I like such “on/off” mental crutches, I believe this concept is an over-simplification that leads to a lot of overtrading among beginners and even professionals. My experience is that such one-day events tend to have limited predictability of market direction when nothing else is considered. It may well be true that no bull market has ever started without a strong price and volume confirmation, but such confirmations are what scientists call ‘necessary but not sufficient conditions’.
For the dot-com bear market, I’ve counted more than 13 of such price-volume triggers that led nowhere and would have caused some impressive account attrition of those acting on every single one. In the course of most bear markets you may and likely will get 5 or more ‘hot-air’ follow-through days before a sustainable new bull trend. Hence, it’s useful to know of their existence but I don’t really assign a lot of weight to them – what drives a market in my eyes is more a “Baruch’esqe” notition of waiting for large money interests re-entering the market widely across the board.
So far, not the case. The same as in the last few rallies in this bear. Again, this might still develop, but it definitely lowers the probability of a new uptrend starting here.
Leadership is thin
If we look at what’s close to new Highs, and what’s leading this rally, the first thing that strikes me is that the best few growth names that I could identify in the last months in this market are not leading the rally. SWAV, CELH, LNTH, and ENPH, the liquid technical & fundamental leaders that held up best against the declining market, are all struggling and/or below the 50DMA – not acting bad (yet), but definitely not supportive of the claim that a rally will succeed this very moment in time. Note the first red bars (Distribution) creeping into the charts of CELH & ENPH.
These are really the stocks that should be leading the rally. The fact that they’re not in new High ground, and that there are so few of them, is another inkling of the bad quality of the market.
Another liquid leader to keep on my watchlist is FSLR – starting to price in a more America-centric production of solar products. This name has been strong and is one of the few names that show accumulation. ENPH and FSLR moved up on only slightly raised Volume when the indices rallied yesterday – not a bold display of power, but rather drunken shouts from backstage seats.
Look at FSLR. Behold the relative strength against the selloff, and the massive clusters of gray up-volume bars indicating institutional accumulation. Pure leadership potential.
Earnings will be reported very soon for the current growth stocks that have best resisted the general market decline (ENPH, FSLR, SWAV, CELH, LNTH). Their earnings reactions will be another major indication of where this rally is heading.
Opportunities are absent
This is where the exciting part of my watchlist already finds its end – in itself a bold red traffic light that the rally will very likely not be sustainable.
A couple of very thinly-traded stocks are also holding up well against the weak market (DGII, AZPN, PI, CCRN) however they severely lack liquidity and thus cannot give any insight into how healthy this market is.
I certainly won’t bother looking at the previous market leaders, stuff like SNAP, NET, or SHOP – these stocks have been blown off their top so far they might as well be listed on another planet by now. NFLX might look encouraging in the short term, but overall it’s 59% off Highs and distribution is rampant – not beautiful. In case they return to new highs in the next years, your screens will bring them back to you.
If you want to look at what market you’re in, look at what is being bought (or not being sold). The issues that enrich my screens (see pie chart) are almost all showing a rotation of money into late-stage sectors, an indication of where we are in the cycle and bearish for growth. Note that “Health Technology” here encompasses many Biotech and Healthcare stocks, including drug stores or life insurance.
To my eyes, there is literally as good as nothing worth venturing into unless someone has severe FOMO – another sign to stay away, for now. Where are the young, innovative growth stock leaders, being accumulated by institutional money? I can tell you … the average 2020/21/22 IPO is 60-90% off Highs.
The tech darlings
Institutional favorites such as TSLA, AAPL, NVDA, MSFT, etc. are all near recent- or 52-week Lows. In fact, this rally comes just in time to yield TSLA some support as it is on the brink of undercutting its recent Low and making an almost 1.5-year Low after a gap-down post its earnings report. Ugly. In the chart, look at how red volume bars (selling) have come to dominate any above-average activity over the last months.
Sitting should be a popular sport now
Sentiment is low, overall. Speculators have bled out half their accounts since the beginning of the year. The bear market is real, painful, many buy-and-hold “investors” feel holes burning into their pockets by now. I sincerely hope that’s not you, because risk management should be one’s number one concern at any time in the market.
The end could just be around the corner, or it could be off another 6 or even 12 months. This rally might develop into something sustainable later, but none of the signs support this hypothesis.
In any case, we WILL get through this. We’ve been in this crappy environment for a while, and the reward will eventually go to those that can patiently wait for the right time to strike, eyes on the price, grinding the ax.
As long as one follows the best merchandise in the market, pandora’s FOMO box will stay closed. Learn how to read the market’s health. The best stocks will let a speculator know when things are improving materially.