A very happy New Year to everyone, and best of luck for any new endeavors you might be planning for 2023 – be it in the markets, in your day job, in love and life. It has been a quiet few weeks and I have just returned from a family vacation. When the markets are down, spend as much time as you can with your loved ones. You can be the best speculator and richest guy in the world, but without family and friends to enjoy life with, you will just end up the richest guy in the cemetery with a grave that never gets any flowers.
It has been a few interesting weeks, and I believe most speculators still stuck in the markets will have been visited by Krampus over this festive season. Or at least by Bad Santa.
Although the dollar has detached somewhat from the fixed-income market and shows prolonged weakness which is good for emerging markets (look at the last few months of the Chinese yuan bouncing), it is due for a bounce at some point. Longer-maturity bond yields found support and bonds are now digestion, continuing a year-long trend of dumping debt securities.
The general market
Overall, we are still in a long-term downtrend in equities and the still bearish expectations on the near-future economic environment have weighed heavily on the decisions of market participants. The NASDAQ has shed over 37% from the Nov ’21 top to the October ’22 bottom, extending 279 trading days. That means it has declined deeper and longer than 4/5 of all NASDAQ bear markets. A quick calculation from my historic study of bear markets shows me this downtrend is getting old and the odds are more and more stacked against deeper and further correction.
Such “statistics” can add some confidence once a bottom is appreciable, but always have to be weighed within context. There are still no signs anywhere visible that the vital signs of stocks are improving, and stubbornly acting on statistics can cost one a lot of money. Just look back at all the fund managers that believed the dot.com selloff was done in 2001. Statistics help, until they don’t. Then they hurt.
Depending on how you count, the dot.com bear market had 4 or 5 waves, or legs, of selling, gradually inching the NASDAQ lower and lower. Right now, it appears that we are entering a 4th down-leg and will likely see more downside and volatility in Q1 of 2023.
Indices break down
The S&P 500 followed the NASDAQ in undercutting its 50-day moving average, a divining rod for good and bad action in the stock market. This move was mirrored by virtually all important indices and ETFs, barring the thinning rally of the recently popular “DJ Industrial” (DJIA).
The NASDAQ is now merely a handful of percentage points from undercutting its October Lows, and the lack of leadership and capital firepower in the markets leads me to believe that this might be the start of a new leg down.
In the next 1-3 weeks, I believe anything can happen. That is both because the New Year is usually a period of volatility, and also because the markets are neither strongly oversold nor overbought in the short-term trend. It could go up a bit, down somewhat, or sideways. I know this is a useless message and not what people want to hear, but for a speculator it is meaningless to try to predict the short-term. What matters is the long-term trend, and it’s decidedly down.
Market dynamics largely unchanged
Not much has changed since my last report … or even since the last few months. Remember, patience is a virtue in the markets, and needs to be actively practiced – only the patient and selectively opportunistic individuals can be reliably profitable in the markets.
The top 3 sectors which stocks enrich my screens are healthcare, food/beverage/staples, and insurances, largely unchanged from before the festive period. It could hardly be more obvious what institutional money managers are doing, hiding from the constant threshing and beating of the equity markets like a dog that sees his abusive master approach him with a belt in hand.
Consumer Discretionary stocks (as averaged by XLY) again sold off harder than Consumer Staples (XLP), as shown by waning relative strength (XLY/XLP), supporting the picture of safe haven seeking more.
Stocks at new Lows boil up, Apple breaks down
New Lows in the markets are outpacing stocks making New Highs by a factor of 6, something to be expected after the recent selloff since mid-December. It is too early to say since the averages have not embarked on a meaningful journey lower since the temporary October bottom, but there might be a long-term bullish divergence developing in this metric summer ’21. This means that every move lower in the indices has produced less stocks equally diving lower, i.e. relatively fewer names are driving this market trend down. Again, it is too early to truly tell, and even if a divergence may be forming, it is by itself more of a supportive condition than anything actionable.
What struck me most in the general market during the last two weeks was AAPL breaking it’s summer Lows and the put/call (P/C, ‘PCCE’ in chart) ratio spiking massively.
I remarked on this in a brief post last week, and how AAPL breaking confidence should be a strong development in this market. The P/C ratio may have spiked for various reasons, from late-year portfolio adjustments to directional “fear” bets. I strongly hope it is the latter, and at least partially driven by AAPL and prolonged index weakness and not only by X-mas holiday illiquidity. Whatever the reason, I believe this to be a strong development – however, it has not been corroborated yet by extremes in other metrics or simply extreme price-volume characteristics in the markets. If the market was to rebound soon and bring up lots of powerful leadership, I would not argue with it and demand further sentiment washout. But merely the P/C standing by itself, I am not fully convinced we have seen the end of this yet.
Leading stocks are uninspiring and show weakness
The only corroboration I can see currently though is not the one I would like to observe. There are bull traps and negatively resolving digestions everywhere across all industries and sectors. There have been more attempts of some stocks to move out of digestions, with lack of commitment and volume participation. There will always be setups whispering at you, at any time. But speculation and trading is a profession of probabilities, and here the odds are clearly stacked against long positions.
Caterpillar (CAT) tried to jump out of its year-long double-bottom digestion, but failed to attract follow-through interest post moving out of a constructively formed platform. I believe this move will be faded at some point in the next few weeks.
Not that I consider CAT a strong leader or even worthwhile for me to venture into for a position. But even here, action would better in an improving environment – such bad behavior is symptomatic of the hostile market we’re in.
Growth suffers most
More bad action showed up in ASO, which move on earnings was gradually sold into. ASO is failing to attract firepower and is now idly chopping around its pivot.
What really caught my attention was the abysmal action and selling in high-quality ENPH and GFS. Both showed almost every fundamental and technical characteristic of a future leader, but as one of the few last growth stocks standing they were heavily sold these past few days.
When the leaders get killed, no more reasons are needed to stay out of the market. It’s as simple as that.
Keep a fresh watchlist and attitude
Sitting on the sidelines gives you the best and most objective vantage point though. In strong markets, I look out for appearing weakness. In weak markets, I look for strength appearing. And it is usually in the most unexpected corners of the market.
Stocks that have been acting very strong of late and that I have my eyes on are CPRX, SMCI, FSLR, and precious metals. CPRX is a low-priced and illiquid biotech stock, FSLR is a solar turn-around stock, while most gold and silver stocks have trouble following the trends put forward by its underlying commodities. SMCI is a rare but still raw gem, but its strength is by itself not indicative of anything. I need to see more, much more – stocks, volume, critical mass.
I admit, this list does not inspire confidence, and such again is a trademark of bad markets. I will certainly not act rashly and try to force anything right now. It is a dangerous, volatile time. Stepping on the accelerator here on a whim will only run me off a cliff.
For the time being, capital protection is key. This may sound obvious to some, but surprising to others. There are those that cannot sit on their hands, cannot wait on the sidelines for a better market. It is largely because they do not know how to tell a better market, thus they jump at every opportunity that could be “it”. As a result, they resemble a blind-folded man walking running through a forest.
Again, I will extol the value of patience here. “The willingness and ability to hold funds uninvested while awaiting real opportunities is a key to success in the battle of investment survival”, as Gerald Loeb told us. Just to give a rule of thumb, there are many well-known speculators that aim to only place 5-10 orders a year, or less. Such does not only reflect extreme selectivity in where a speculator commits capital, but also when.
And the when is definitively not now.