Hello friends,
Last week can be largely summarized as a drift without conviction. Most days were similar to the meandering trading action seen in the previous few weeks, characterized by broad back-and-forth between the bull and bear camps, but overall neither advancing nor declining significantly. We remain in a choppy market that is difficult to trade – you’ll work a lot to make a few pennies … and life really does offer better things to do than trying to stare stocks into submission on your screen.
It has been difficult during the last few weeks and months to describe the market using indices, as those influenced heavily by the tech mega-caps (S&P500, NASDAQ Composite) show a diverging dynamic to the rest of the market (e.g. NYSE Composite). As the latter has sold off heavily during and after the banking episode, the good old MMAAG stocks now appear to serve as somewhat of a panic room for both retail and institutional market participants, pulling up those two indices while the broader market receded.
Market internals do not improve during rally
With the exception of Friday, the whole week of rally/bounce was dominated by weak volume and thin trading throughout the exchanges. Lacklustre sideways and updrift have led the market now into an overbought state in the short-term. Were we in a healthy market, this would now ideally require brief digestion of a week or two to stay sustainable. But, we’re not … also, a pure technical measure of ‘overbought’ does not really matter all that much, however it comes along short-term extended indices and group ETFs while this rally is more and more thinning – a dangerous combination.
Despite the wild action on Friday, the strong relief bounce that was seen on NASDAQ post the banking hangover, and the general 20% rally that NASDAQ has staged over the last 6 months since October, not all that much has really improved in the market. Stocks breaching new high prices are outnumbered by those falling to 1-year lows in price by a factor of more than 3. Only about 50% of stocks are above their longer-term moving averages … numbers which are not supportive of the ‘arrival of the new bull market’ thesis that all the pundits are shouting from the rooftops again.
Complacency remains steadfast
Complacency has ticked up again, or rather has never really ticked down seriously since this bear market started. Implied volatility of S&P500 options is again near its lowest point within the last calendar year, suggesting that speculators expect smooth sailing ahead, while newsletter writers still push the bull narrative to anyone who will listen.
I am trying not to let my opinion influence my view on the markets, and getting overly bearish has led to many a speculator miss a fledgling uptrend. However, when scrutinizing what really drives this market, one quickly realizes that there is still few substance in the current advance. On the strongest day of last week, Friday, where volume rose somewhat on NASDAQ (but meaningfully almost nowhere else), the stocks that were up the most eerily reminded me of the previous bear bounces but also the late 2020/21 market. U, SNOW, BRZE, CVNA, AFRM, UPST, IONQ, MARA, EVGO … and of course, this was topped by the Mac Daddy of FOMO stocks, c3.ai (ticker AI). The other stocks I mentioned were up in the range of 8 to 12% in a single session, but AI stock exploded 21.5% in a single day.
AI is not a new technology, in fact it has been around for decades – the companies that truly leverage it are just not making such a baby fuss about it as ChatGPT. The only reason AI stocks are making a splash is because of these chat bots in the news – I actually got a notice from my broker that AI was one of the most-bought stocks for the first quarter. What the ‘retail investor’ does not realize is that old news (and AI is really not ‘new’ news) do not matter to the stock market, or to those that control enough capital to manipulate it.
What do all these mentioned stocks have in common? Well, they are all hopelessly dumped by the smart institutional money, deep underwater, and none of the underlying companies make any money, of course. These rallies are the dumb money loading up on low-quality stocks that they perceive to be of “bargain” value, a classical sign that this market has not corrected enough. I’m not saying any of these won’t become profitable eventually, but this massive buying into these stocks at this juncture clearly displays who is in charge of the market, and it is not strong holders.
Market is led by defensives, value and …. semis?
I like to run screens that show me which industries and sectors “enrich” the stocks that make the most price progress, i.e. get an overview of the industries which stocks are bought the most over a given time frame.
Right now, one of the most prominent groups is semiconductor manufacturers. That falls in line with the fact many of the leading stocks I’m monitoring are within this industry. Despite being a great growth industry that usually receives strong inflows during new bull trends, by itself, it cannot turn the market around at this point. It’s a great start, but corroboration is needed, and that is just not found yet.
On the other hand, recessionary plays and defensive industries abound on my screens – food staples, beverages, and food stocks ranging from confectioneries to frozen foods. Stocks among the likes of BUD, MNST, ULTA, ELF, LW, HSY, GIS or MDLZ are leading the market, followed by low-cost restaurant chains, some residual industrials and electricals (e.g. JBL, VC, GE, CDNS), uninspiring “safe bets” (DOX, CTAS, FICO, EME, OMC, CLH), large-cap biopharma, and even some telecom stocks (e.g. MSI).
On everything, everything bounced a bit, but overall there was an air of rotation rather than committed buying. This market reeks of money managers hiding in a hole.
A lack of follow-through
Overall, even more interesting stocks as a group display questionable action. DKS, the sporting retailer, has fallen back after some earnings euphoria, retracing all price progress made since the gap a few weeks back. Similarly, ASO is stuck like a frozen rope, unwilling to rally with the market. Both these retailers suffer from strong earnings/sales deceleration … the first inkling of people stopping to forcefully buy stuff with even more credit card debt?
A few stocks these days are not dropped by the investment community, despite apparent earnings deceleration. RMBS, another semiconductor, shows great action despite negative growth over the last few quarters. Early discounting of change, or late stubbornness of speculators? It does not matter – as the market is not in a place where I would start arguing with myself whether getting in on such stocks is worthwhile, the odds are just not aligned.
RMBS though is a rare stock that shows constructive action around digestion periods. There are not many constructive digestions to begin with, and those stocks that try to stage a move off them attract no volume – look at CRUS, ADI, or BKNG. No great names nor great patterns to really get excited about, but were this a great market, these would at least show somewhat different behavior.
Leading stocks are stuck in the mud
As much as the NASDAQ rallied, its wild bounce has not spilled over to the portions of the market that really matter.
MBLY, one of the more liquid and good-quality stocks, has formed somewhat of a digestion pattern, but has not moved out while the market has become overbought in the short-term. The train has not come in on time, did it get derailed out of town? This should have decidedly moved out by now. It found support after its selloff of the last few weeks, at least holders aren’t selling en masse … but people aren’t buying much either.
A similar semiconductor stock, GFS, has been victim in my reports for a while back now. It’s fundamental prowess is undeniable, but it fails to attract any attention from the big money. It is trading in an idle chip-chop, and right now is forming an erratic wedging flattish digestion pattern without any volume profile worth mentioning.
Other leading stocks like PI and SMCI are equally chopping about, making risk management difficult to impossible, offering no good entry points. No hard selling, but neither constructive action either. There is a constant battle of bull and bears across the market, and these stocks suffer from the same dynamics, although as a group they tend to behave much better.
I emphasize ‘as a group’, as even the better stocks can blow up in this environment. The heightened risk of being active in this market is reflected by AEHR. Both AEHR and SMCI show how new highs in price are almost compulsively faded by large trading desks at the moment, but the recent volatility and Friday’s gap-down and sell-off in AEHR after a lowered future outlook during its earnings report will be difficult to stomach for any speculative holder that entered the stock recently after a low-quality digestion.
Why be in this market at all? When you’re stuck in quicksand, you should only move when you know you can grab something that will pull you out. Grasping at any feeble straw that will break at your slightest touch will only sink you deeper in the mud.
At this point, the odds are against us as speculators – it’s not our time now. The earlier we understand that no strategy works all the time and that we sometimes need to sit on our hands for prolonged amounts of time until it starts working again, the earlier we will progress to the next level of skill and success. Take that which you ‘want’ out of the equation – only look at what there really is … and at the moment, that’s really not a lot.