Dear friends,
Another barren week into a questionable rally, largely fed by dip-buying into damaged tech stocks from the past years and the ever-complacent trader too eagerly buying back on nothing but hopes that the Fed will pivot earlier than previously expected. The “Fed Whisperer” at the WSJ has turned up the FOMO even more, bringing the hope of reversing monetary policy now also more and more to institutional money managers.
Frankly, without some sort of a crisis (e.g. corporate or government debt events, escalating rhetoric in the Ukraine war, or else), this is unlikely too happen, as we have just about started seeing the first small inklings of the immense effects of extreme Fed hawkishness over the last year.
This will become clearer in the next 2-6 months, and the large bulk of corporate earnings reports is yet due in a dangerously extended market. Of course, the stock market discounts 6-9months ahead, and a market bottom would occur far in advance of the economy recovering. But there are just too few signs that things have materially improved.
People tend to over-analyze the action on the large stock indices. Looking at the stock averages has its place, but it is by far not the entire ballgame.
General market is split, but differently this time
Technically, this current bear rally has been dragging on since October 13, with no new Lows being made in the selloff in December. While over October to mid-December the more value-heavy indices of the DJIA, the S&P 500 or the NYSE had been leading over the NASDAQ, over the last few weeks the latter has been slightly outperforming.
Markets are now in their most extended and overbought state they have been since December 2020, including the FOMO-heavy July/August rally in 2022.
The rally on NASDAQ stocks was overall on rising volume. This would be a good sign, if most of that volume was flowing into novel ideas in the growth area, suggesting a new bull market was around the corner. Effectively, some money has rotated back into growth areas, but unfortunately this was largely a rotation back into the ‘obvious’ trades from the last few years, indicating bottom-fishing and dip-buying by the wider public and even now some institutional money (along some short-covering into earnings reports). More on this below.
Meanwhile, volume on all other indices was significantly waning, signifying lack of confirmation and conviction from the wider market on this move. The NASDAQ is now running into 3 types of psychological resistance levels – the down-trend line of the bear market, the 200-day moving average, and a horizontal price level of a bout $11500, which has rebuffed this index 3 times before.
Friday’s attempt to move above both the 200DMA and the horizontal price level will be a meaningful bull trap should the rally roll over, pulling in a lot of technical traders and fundamental buyers back into the market here.
Commodities have a revival – the question is, will it last?
The signs of where this market is heading are still unclear. Will growth get a major revival soon? I don’t see any signs indicating this, from an economic or a market perspective. In fact, we might be turning into a more commodity-driven market again. Recently, the precious metals gold and silver, steels (e.g. STLD, NUE), copper (e.g. SCCO, FCX), and energy (oil & gas, coal) have been among the strongest performers in the market.
However, even here success is by far not a given.
Most precious metal miners are merely rallying within their down-trends. Silver is digesting nicely with bullish support on a shakeout on January 23, and at a decision point now whether to break the long-term downtrend. This might take over leadership from gold again soon, which is severely extended and in need of a digestion.
As for energy, first reactions to earnings reports in CVX or SLB have not been ideal. The ‘oil play’ might or might not be over, but in any case I don’t see anything remotely inviting.
What I do find interesting in commodities is copper – there is a very strong move in SCCO, which is corroborated copper futures and by other sister stocks of the group. SCCO is just about to break it’s downtrend now and could be worth to try a small probing position for me here if it can hold a move above the current platform on massive volume on the earnings report in 2 days. This though this is still heavily predicated on the general market and a move has a high chance of failing, so in any case I will not risk much until it has proven itself.
The NASDAQ rally is largely driven by damaged goods
As I wrote above, there were remarkable accumulation signatures visible on the NASDAQ Composite over the last few days. But the averages are just that, and stocks themselves tell a more clear story of what has been happening – namely, a move back into the good old darling stocks from 2020/21.
Semi-conductors had a strong move, partially because of an upgrade by a Barclays analyst on Qualcomm and AMD. QCOM, AMD, TSM, MPWR, MRVL, SLAB, WDC and many others rallied along these two, as well as NVDA which posted a 91% rally since October after a 69% decline … talk about buying the dip. But technical action at key junctures remains weak, as stocks in stronger technical positions such as LSCC or KLAC cannot muster up any significant strength when passing over pivot price levels.
If this was not enough, check out all the stocks that were bought heavily these last few days, leading to outperformance in niche ETFs including ‘IPO’ or the Ark funds: SHOP, U, AFRM, SQ, W (up >100% !!), BOOT, PDD, LI, ABNB, STX, OPEN, DDOG, NET, SNOW, RBLX, RIVN … and the uber-darling TSLA that rallied >77% in the last few weeks, 11% in one day on the earnings report.
What’s not to like? Well … right now they are old news, they’ve lost their sparkle and have a large amount of natural sellers in shareholders circles that are likely to impede any real progress soon. While there is a number of great new merchandise here (e.g. ABNB, RBLX), such eager capital inflow into these type of securities at this point in time suggests that complacency is still reigning supreme, which is a problem from various standpoints.
Suffice it to say that speculators need to understand – there will be NO repetition of the market in 2020, at least not in the stocks that were hype back then. New markets are driven by new strong stock leaders.
Complacency as mirrored by such bottom-fishing in cracked stocks (of which the majority has declined 45-70%), while the VIX is back down at 18, bullish newsletter writers outnumber bearish ones by a factor of 1.6, and money managers are already long ~75% on average, is a large yellow-flag that speaks against this being more than a bear rally. It’s a proverbial shot across the bow that this rally is on very thin legs.
Thin stocks lead, liquid stocks wobble
Bad action could be observed all across the market, too much to lay out in detail.
As a general pattern, lower-quality issues and those that are thinly traded seem to dominate the marketplace – micro- or small-cap biotech stocks, usually extremely illiquid and portraying a wholesome lack of solid fundamentals, and a couple of rather thinly-traded semi-conductors (e.g. AEHR, ACLS, RMBS, AMKR, ALGM).
The latter ones might or might not become better opportunities down the line when their liquidity matures, however so far many of them are extended after moving out of very faulty digestions, and some could be described as almost in a climactic move. Take AEHR as an example – a niche and relatively unknown company that now has a heavy leg in the Silicon-Carbide semi market. It’s rare to see a stock make a >1000% move in a bull market, and then both crack 76% and rally another 460% in the ensuing bear market. This is either extreme strength or a late blow-off. Only the chart will tell, and I will keep my eyes on it – for the moment, they all remain not actionable.
Meanwhile, the stocks that would clearly herald an improving environment are still suffering from the weakness of the market, and any attempt of life is swiftly suppressed.
GFS remains in a weak position. MEDP, a stock that could have been toying with leadership ambitions was immediately sold off upon trying to move into New High ground. Not a good sign.
Probably most insightful last week were CPRX and MBLY.
MBLY, probably one of the most promising IPOs right now and already fairly liquid, was rebuffed from moving up three times in the past few weeks, and got slammed hard and reversed when trying to move up on an earnings report surpassing all expectations (125% EPS surprise). While the NASDAQ ran up in a frenzy, stocks like MBLY should have been leading, but old greasy TSLA started turning in its grave instead.
CPRX exploded downwards on some bad news of its main drug – as you can see, no stock is ‘safe’, even when the company has great fundamentals and technical action is strong. The stock was in an extended position, and since it never set up a proper low-risk entry point, no one should have been caught in this gap-down. Risk control is and will always remain job number one for the speculator.
Conclusion
We are 3.5 months into this “rally”, and the question in everyone’s head should be: Are there quality stocks leading this rally, or is a small handful of low-quality stocks along overhyped and heavily damaged past tech stocks trying to entice people to enter a precarious market environment?
The current rally may look strong on the indices, but overall, individual stocks could not stage a worthwhile advance. Why are you in the game – to marvel at the S&P 500 and make impulsive decisions based on a statistics (because that’s what averages are), or to wait for the true opportunity of latching onto the new super-leaders of the next cycle when the coast is clear?
Across the market and many hundreds of stocks, volume is fading strongly the longer this rally is going on … what do you think is most likely to happen to those stocks that are found in weak technical positions when the market starts to work off its current state of extension, and perhaps roll over into another bear leg?