I wish you guys all a wonderful week and hope that watching the NASDAQ gap and close up more than 7% in a day did not cause too much jealousy.
The volatility that reigns in bear markets can be very violent, and such days are not uncommon. If you were short last week in the wrong names, you might have had to cover rapidly to not lose your profits – and so did many many people on Thursday/Friday.
To numerous traders and speculators, last week has been a FOMO fest at its best, and many will have committed significant amounts of money. I expressed my distrust of the rally over the last few weeks, and despite the truly positive action of the last couple of days, I do still stand firm in my opinion. For the moment, cash remains king.
Looking through my charts, I’ve been paying more attention to the dollar, now severely weakening against multiple currencies (Euro, Yen, Pound, AUD,…) as can be seen in the US dollar index DX. The dollar weakening is an EARLY condition for improvements in the world of equities, but again it is NOT an entry signal.
This is followed now by a pullback in longer-term bond yields (but not yet shorter-term maturities, that are closely tied to rates). Rising yields and the dollar are a cold spell to stocks. The spread between the 2- and 10-year bond yields has become more negative than it has been during the 08/09 financial crisis, during the dotcom aftermath, and decades before that. The fixed-income market has severely priced in near-future risk and uncertainty in the economy, a similar picture can be seen in the corporate debt markets.
A news-driven environment
There is so much negative news from all fronts, but at the same time, the first seedlings are starting to appear that things just might improve over the next few months. However, the stock market has not responded yet in a way that would warrant me to commit significantly beyond minimal probing positions.
Pre-Thursday, I was thinking that if the likes of Mcdonald’s and IBM lead the market, beware. There was a lot of low-volume rallying, indices fighting with the 50DMA, and stocks losing follow-through buying after exciting earnings report reactions. The massive eruption on all popular indices Thursday was obviously a relief reaction to improving inflation metrics.
You can argue whether any of the CPI, core CPI or PCE indices are good or even useful ways of looking at how inflation can be measured, but the markets believe the Fed is using them to justify their actions and thus they do matter. As good as all western markets and some eastern ones too reacted in a similar fashion. Shows you how the world weighs US markets.
In any case, the NASDAQ and the S&P 500 have been rallying into the end of last week. A violent rally it has been, but remember that bear markets tend to show the fiercest price-volume action of all possible market environments – in fact, volatility can be massive around such closely followed point events. “All Eyez On The CPI”…
Looking at the Advance-Decline differential, the VIX, and the put/call volume ratio, it is important to realize that both the NASDAQ, SPX and the majority of issues on the NYSE & Nasdaq exchange are in a strong short-term overbought state.
Equally weighty, the DJIA, mid-cap industrials (and also European markets, e.g. SPDR portfolio ETF) have not only become extremely short-term but also intermediate-term overbought. The market is split between lagging areas and the extended DJIA-type groups.
The trend is still up, but probably not for long
The trend still remains up for the moment, as there was a lot of excess on the downside to be worked off. The NASDAQ, which has been lagging in this rally, could rally another 1-3 weeks or more, up to 6-8% above its 50DMA, its downtrend line, or even its 200DMA, as previously seen in the March and summer rallies.
Starting new positions though in an overbought market is calling for trouble. There are exceptions to this, but we are certainly not at that point.
But, for the indices themselves to become and stay healthy, they all need to digest without too strong volatility now over 2-4 weeks sideways, find support, and march on. The more they rally on, the more digestion they require.
Breadth and trend age profile
So far, breadth has been terrible, and individual growth leadership almost absent. Because, after all, we are still in a long-term downtrend. We are making lower Lows and lower Highs. This bear market has from its November top now been 246 trading days long. It is certainly maturing – merely judging by its duration, the odds of the bottom being in are at about 2.5:1.
Pretty good odds, but stats are just that – stats. A market does not rally on stats, it rallies on money and conviction. As discussed before, the lack of capital flowing into quality issues, and the degree of complacency despite this radical decline is putting a big question mark behind where this rally can go. People talk bearish but act bullish.
Notable action is confined to stocks in no-go zones
TSLA, both institutional and ‘retail investor’ darling, has successively made a 1- and 2-year price Low. Great to depress sentiment further, but I believe that AAPL is the last bastion of the growth bulls, and most likely will need to follow the other FAANG/MAANG stocks and decline 35-50% off the top in order for people to throw in the towel. AAPL is chock-full of institutional money, everybody and their aunty are in there along with Buffett. This would turn the despondence dial way up.
As you can tell, I have strong doubts about this rally. Of course, being absolute can get you burned in the markets, so I reserve the right to change my opinion upon the presentation of new bullish information. Why are the signs pointing against this rally being sustainable?
The gap on Thursday and more buying on Friday seemed good for stocks … but for which ones really? Looking at my screens on these days, the overall pattern is that stocks within downtrends have rallied the most, and current leaders were not behaving as desired.
The ‘IPO’ ETF was up until a few days ago leading on the downside, then it rallied about 16% in two days – massive for an ETF. IPOs components are however largely severely beaten stocks, many of which don’t have earnings (RIVN, SNOW, DASH, PLTR, RBLX,…) which also turn out to be strongly hyped or even leading names of the last bull that have been and are in severe downtrends.
Similarly, ARKK ETF again rallied strongly, 24% (!!). Old, previous bull-market tech leaders were found on top of my screens when ranked by %-gain. APPS was 88% off the Highs before it bounced >75% in two days … it is still 73% off Highs now.
AFRM, ASAN, DOCS (bounced >45%), MTTR, CRSR, CVNA each rallied massively. Semiconductors were especially strong, with ON near new Highs, but also now-laggards AMD, NVDA and AMAT rallied impressively. Hammered retailers also participated (NKE, CROX, EBAY). Tech mega-caps of course were there too, all 20-70% off Highs.
All these are no-go zones, and such strong interest shows only two things – panic covering of short positions (mainly institutional), and more dip-buying.
What are the defensives doing?
What was enticing was a (temporary?) rotation of money out of some safe havens. Food staples, health insurance, pharma/healthcare staples (e.g, MCK), and other high-EPS stability recession plays, many of which had been leading for weeks or months, were heavily sold and their digestions resolved negatively.
Though, whether these rotations are only a week-long overreaction to the new inflation data, or are the harbingers of something more permanent, remains unclear as of yet.
How about growth?
Unfortunately, this is where the positive action stops of the last week that was characterized by such a seemingly rampant rush of speculator money into the market. Rare issues such as FSLR or SMCI are still strongly leading the market, but they are just not enough to start shouting from the rooftops.
In the stock market, it is not always about what you can see, but also about what’s missing. As Trader Vic writes, it is your job to pay attention to what the market is saying … and to notice what it isn’t saying.
Currently, leaders are acting like zombies, and are few in numbers – a ‘lack’ of something.
SWAV had a relatively bad reaction to another phenomenal earnings report (>1000% !!!! earnings growth YOY, >100% revenue growth, 109% consensus beat), gapping down and closing about half-ways.
Reminds me of LNTH a couple of weeks ago. Not great action, but some support came in. Friday’s negative action, even if not on massive volume (~47% above average) while the indices were exploding like the Beirut harbor, is definitely displaying a ‘lack’ of something.
ENPH is bravely resisting decline and attracting good volume at times. Trading about $1 billion dollars a day, it is insanely liquid.
ENPH had formed a volatile basing pattern here. As I wrote last week, I gave this a likelihood of this working out. On Friday, a move over $317 was attempted on rather limited volume in the early morning session, and shares sold off immediately within the remainder of the day, to close at the dead Lows.
This is something I call a ‘hollow breakout’ – an early morning move above a digestion pivot price level without volume, largely driven by ‘retail investors’ pushing the price above the pivot level, but not attracting follow-on volume. Precedents exist that this could still work out, the odds are low and given the overbought market, I would not bet my hat on it.
Let’s just say that a good market looks different – again, a ‘lack’ of something.
ON Semiconductor has benefitted from the industry move in semis, and has rallied close to new Highs … on volume that can be called anemic at best. The relative price strength though is unmistakable, and the fact that it could remain so close to new Highs when most other semiconductor stocks are down in excess of 30% is an extreme sign of strength and that institutional investors have not dumped this along with everything else.
I will keep a close eye on it, but the current action is not too convincing … a ‘lack’ of something.
The list goes on like this, but you get the idea.
Metals
Taking a small sidebar here, a group of institutional managers have become very interested in gold (dollar declining) and copper recently. GFI, and SCCO, just as a few examples, have made strong moves. Whatever may be driving these, I don’t buy into overhead supply from trendline breaks or the bottom of 60% pullbacks. Also, as I have written before, most commodity stocks chart the way a drunken grandpa drives, so it is always hard for me to stay in a position. But if this continues to power on, this might develop into something interesting.
Markets hostile for the time being
Considering all the above, the bottom line that I’ve been preaching for the last months remains. In my eyes, the market does not reward any long exposure.
Just because this bear market is maturing, does not mean that it cannot become ‘the village elder’ … it might carry on like this for another week, or for another 6-9 months, or worse, even longer.
There are more and more secondary conditions being triggered that will turn this market into a very strong opportunity once it turns. So keep your mood light – the worse it all goes, the better for the growth stock speculator.
One may weigh last Thursday as a strong rally confirmation, making October 13 a temporary and tradeable bottom. I don’t do work the small swings anymore frequently though, it is too stressful being glued to the screen constantly, and I have a life next to this. Plus, I can make more waiting for the real opportunities.
‘Rally’ does not mean ‘need to buy’. You may find yourself to have an urge to trade a setup, although the market overall is bad and your odds of success are low. You might start to talk yourself into it, ignoring rules.
One way of dealing with such FOMO is observing your decision-making mechanism. Write down what your rules say, write down why you want to place an order today, and write down how the two agree or disagree. This will take some steam out. Slowly, you will start to understand why these impulses arrive, and that it usually is a good idea to distrust them.
No one said it would be easy… Becoming a pro, or even adept, takes a long time. A lot of reading, thinking, experience, making mistakes, and learning from them. But in the end it is very well worth it for your psyche and your wallet.