Hello friends,
Let’s start this report with the usual high-altitude overview. US equities have, as a group, been stuck in a choppy sideways trading area. Here, as also seen in the recent past, indices driven by the glamour mega-cap blue-chips have outperformed and even slightly nicked New Highs a few days ago (SP500, NDX), while microcaps trade near bear market territory (IWC), and small- and midcaps (Russell 2000, SP400) are dangerously close to breaking the already precarious choppy uptrend.
However for large-caps themselves, things are not that rosy, as lopsidedness and extreme concentration sums up the mode du jour. Even the titanic MSFT, AAPL or TSLA have stopped leading a while ago, while NFLX and META & AMZN are the last stocks trading close to new Highs. In fact, the last few weeks brought some heavy whipsaws afflicting the market broadly, namely Jan 27th when DeepSeek appeared on the radar, and last Friday on the heels of some disappointing economic data. A strong market shrugs off such negative news, which tells you more about the environment we’re in.
This market is typical of a late-stage environment full of exuberance and peaking concentration. More blow-off moves in dwarfish AI stocks, failing breakouts and moves into new Highs for many leading stocks, or heavy selling pressure into earnings reports of important leading stocks are some symptoms.
Due to the extreme concentration, exuberance, compressed volatility, limited de-risking behaviour, the theme of AI, the latest collapse in many small FOMO stocks in the space, and NVDA’s ongoing leadership and its latest reaction of to AI news (NVDA -17.9% on 27/1, a 99.7th percentile move overnight), I believe that the latter’s earnings report coming out on Wed/Thu has the potential to be pivotal to the short- if not long-term behavior of this market. NVDA has virtually chopped sideways since last June after a >1220% move off the 2022 Lows, another sign of the tiring market.
My current market thermometer for US equities lies at a 2 out of 10. A bad number, and one might wonder why it is so, in the face of rallying SP500 and the many strong moves in microcap AI stocks. But I judge a market by its capability to allow capitalizing on low-risk high-reward scenarios in individual stocks, most of which have started behaving badly, stalling or cracking and selling off in the last 2-3 months.
Because this situation could turn around quickly and NVDA launch a final melt-up of the SP500 and NASDAQ running ludicrous distances predicated on just a handful of stocks (such as seen in the late 1990s), we should always keep our eyes fixed on strong small- and mid-cap leaders to both tell us the truth what’s happening and potentially yield us trading opportunities. If good ones appear I shall act on them, but I cannot currently point to any as I believe there are bar none.
Better opportunities lie currently in Australian and Canadian miners and resource stocks, with for example TNZ and AII or BC8 and WIA setting strong precedents. Even better opportunities are seen in European markets (specifically in the Italian, German and Polish segments), with these of course smaller-cap stocks making strong moves. Take a look at MILDEF and TRUE_B (Sweden), THEON (NL), ELT, SNT or CCC (PL) rallying along the indices which themselves lifted recently out of a secondary correction. Due to the persistent bearish news from those markets I believe these stocks have much less risk inherent, an observation that has been confirmed by many breakouts from proper digestion areas into new Highs working well.
Of course, all of these trends have the potential to roll over quickly, should major events derail the US markets … as we know, when the US sneezes, the rest of the world catches a cold.
For the moment, though there have been some improvements in smaller individual markets, I do not believe it is a time to get heavily exposed. We are missing both the basic conditions and the individual stock opportunities to do so. Only patience, further observation, and strict risk management will point the way.
So long,
TGS