A volatile week has passed, with more hawkish sentiment from the Fed and earnings leading to renewed distribution and selling in important names. A volatile week is ahead, with an impactful election and more inflation data coming in. By now, most of this will be priced in by smart institutional managers that can access information that the rest of us can only dream of, still volatility will reign during these events.
I will already state here that not much has changed from last week – economic deceleration and monetary tightening are rampant, and risk-on assets have been suffering. I can find the first cracks starting to appear in the bear case (e.g. the temporary weakening dollar despite rising rates), but as of this moment, there is no case for me just yet to jump in and throw my money around wildly.
General market
The NASDAQ has been rebuffed by its declining 50DMA, succumbing to a lack of buying power and overhead selling pressure. The Fed’s statements hammer strongly leveraged companies the most – commonly growth and Tech names that the Nasdaq is rich in.
As stated in the last report, heavy distribution early in a rally is a problem, but selling off so deeply decreases the chances of the rally to turn into a successful uptrend well below 10%. The SPX as well just made it over the 50DMA but reversed as well back below it on rising volume. Both SPX and NASDAQ are in a weak rally and thus temporarily in an intermediate-term uptrend, but perhaps last week was already the peak of that. Although chances are low, this rally could move on higher IF we see some clean digestion here in the indices as the market was severely oversold until not too long ago.
Remember, almost any ”investor” looks at the indices for orientation, making their price-volume activity important to behold as both a technical indicator and a psychological insight into what Wyckoff called the ‘composite investor mind’.
We will see how far this rally goes, but with its recent behavior and the fact that historic NASDAQ bear bounces make a median ~10% move, we are at a crossroads where this could head in the next months.
Sentiment
Irrespective, the bear market continues to kill equities and the accounts of those ‘long-term investors’ that are stuck in their pet stocks. A look at the VIX (and factoring in yet another temporary ‘danse macabre’ in meme stocks) tells me that people are still complacent, which is mind-boggling considering we are in one of the worst markets for over a decade.
Not just that – in January, near the end of the first down-leg of this bear market, the VIX was at almost 40; now, having shaved 38% off the Nasdaq during a cruel but well-controlled dumping fest, and sitting near its Lows, we are at a meager 25. This is highly unlikely to stay this way before a sustainable bottom comes in.
Growth vs. value
The DJIA and its components were and are leading into a strong overbought state, and a look at some of its heavier weights shows what is holding it up, and it’s nothing that growth speculators are interested in even remotely.
Classical growth, however, has been severely lagging in this entire rally. Previous leaders ZS, TTD, DDOG, BILL, CRWD, TEAM, NET, or MDB have long jumped out the window, following earnings volatility or the general market drift. But be wary of looking at what was leading during the last bull market if you want to know what might lead the next.
Let’s look further at what has happened last week in the leading issues.
ON Semiconductor had a negative reaction to a great earnings report. This is one of the stocks holding ‘closer’ to its previous Highs in price, and such a reaction is a result of the bad market we’re in.
The standout event from last week in growth names has to be SMCI – this provider of computer and server hard- and software has had a great move on earnings; the bad Close on the day was due to the bad selloff in the general market. Also, note the frequent moderately-large gray volume bars in the recent future – signs of institutional accumulation.
SMCI is meddling in IoT, scalable solutions for 5G, edge computing, AI, etc. For some reason, I can see these items finding demand in the near future… With about 50M$ changing hands a day, liquidity is not amazing but also not nothing – this will be one for my watchlist for whenever this hostile environment is over.
Provided of course SMCI does not sell off first, there is no sure thing in the markets.
Thinly-traded issues outperform
RMBS and HRMY had some strong and positive reactions to earnings reports; however, both are very very thinly-traded issues. I will remember these for later, but would not dream of touching them until we have entered a really strong market that would balloon up such stocks strongly and forgive occurring hiccups.
Look at FNKO, SRTS, or PLAB for a lesson on what can happen with thinly-traded names when the bid dries up on sell-the-news, missed earnings, even good news, or other revelations that speculators might not be too inclined to take positively at a given moment. When there are no institutions supporting price, such gap-downs can be severe in illiquid stocks and cost a careless trader owning it dearly.
Better-grade stocks suffer
The winner for bad action this week is LNTH, one of my recent favorites from the bio-med industry. LNTH suffered a bad selloff on a blow-out report: >1000% earnings growth (YOY), >100% revenue growth, beating estimates in both.
Despite its recent relative strength, this stock is for the moment in a no-go area; the steep gap-down on Oct 7 might have warned the keen chartist that something is wrong. it will remain on my watchlist, but it will have to prove itself again.
Similarly, CELH had been acting very well until a few weeks ago, but now has succumbed to the general bad market. This current down-drifting price action might turn out to be the left side of a new basing pattern forming; however, patience will be key here.
ENPH – the prior week it posted a great earnings report and had a good reaction; however, this basing pattern is currently asymmetric and volatile still. A tight-price-action consolidation would need to develop for at least 2 weeks for this to be sustainable.
And even then, I very likely won’t touch it should it move into new Highs. In a bear environment such as the one we’re in, my stringency requirements in selecting setups are raised drastically from the previous bull market. Acting only on the best opportunities and letting marginal ones pass by helps me to protect my capital. Nothing has been working recently, so it’s time to watch for now.
Probably currently the most crowded trade at the moment, SWAV is also in a choppy pattern. If you squint, you can see a faulty digestion … but you shouldn’t have to squint. The negative reversal upon touching new Highs last week was very bad action. Earnings are reported today (Monday) after Close, I expect more volatility and whacking around. More opportunities in better environments will come, and I will wait for the better ones.
Why I’m on the sidelines
I do not listen to the ‘fear of missing out’, or any urges, when in the stock market. I listen to what my carefully thought-out risk management plan says. Right now, it says that the time is not right to increase exposure on the long side. I need to see radically improved market health and leadership action to even start probing.
Only highly skilled scalpers or swing traders have the potential to benefit from this market, and I think no one else should be in it right now.
Anyone else will have to wait it out. Embrace patience. Instead of being long stocks, be long patience – a virtue forgotten or never really learned by aspiring speculators.
Gerald Loeb said that the willingness to sit and hold money uninvested is one of the keys to success in the stock market. Make this the line you write in your diary. Make it your meditation mantra. Name your baby ‘Patience’. Whatever it takes, one needs to respect the risk that choppy markets bring with them.
Everybody wants to succeed right now, but the market does not care what you want. Blend out all marginal temptations that you are being offered, and wait …. for the time that the odds favor your success again.