Hello friends,
I believe Bilbo’s quote from the Lord of the Rings, labelling his exhausted existence as too ‘few butter scraped over too much bread’, rings true when observing the dynamics of the current markets. Much ado about nothing. A whole lot of talking, but no walking the walk. Technically, many of the important markets averages continue to trend up on an almost daily basis, while a look under the hood will assure most an individual stock trader that the leading stocks of the day are not the trustwothy beasts that one should expect them to be.
Let’s start with the US/North-American market, it being the most liquid and important equity market on the planet.
The old divergence that has been in place for well over a year now has kept rolling on the last week – while the mega-cap enriched NASDAQ Composite (COMP) and SP500 (SPX) keep making hew Highs, mid-, small- and micro Caps are chopping idly sideways. This is now confirmed by the Canadian TSX. The monstrous rally of the two popular giant indices COMP/SPX, further propelled up by forward discounting of rate cuts as per last week’s FOMC meting, remains unconfirmed by the broader segments of the market. This leads to an overall choppy trading environment and failures of strong stocks to move out cleanly from digestion zones (e.g. RDDT, POWL, RXST, JANX, VKTX, etc).
On top, I can’t help but feeling reminded of typical market top conditions by the recent extravagance including the FOMO-stock NVDA 10:1 split, AAPL’s AI melt-up last week (a 98-percentile move), semiconductor IPO ARM wedging yet again into new High price, leader SMCI blowing off at the top, and another iteration of idiotic retailers being drawn into yet another Gamestop pump’n’dump.
Looking at the divergences between segments (below SPX [bull market], Russel-2000 RUT [technically bull market, de-facto flat chop since 2022], Russel microcaps IWC [still in bear market territory, flat chop]), and between stocks leading the rally and general rally participation, the general impression of the fundamental malignancy of this market has not improved. Money can be made in passive strategies or shorter-term swing trading, but when it comes to real money-makers a deafening silence stands out.
European markets
All the while, the ECB has surprisingly decided on some first initial rate cuts a couple of weeks back, trying to rescue sentiment waterfalls due to economic slowdown. The markets have responded in near-uniform weakness, with trendline breaks and minor to major selloffs afflicting as good as all the main indices of the Eurozone, led by the German DAX, the French CAC, the Polish WIG, the scandi OMXS30, OSEAN, the greek ATHEX. The average pullback can also already be spotted on the broader Stoxx 600 and the Euronext 100, though bluechips (e.g. the AEX, led by everstrong pharma giants) continue to hold up.
Whether this pullback will manifest into a larger correction will likely depend on US market behaviour.
Some nice standout leaders are still appreciable (e.g. the thinly-traded Polish issues of RBW, SNT) though after the volatility and weakness experienced throughout European markets (case in point GUBRA whipsaw despite the OMXC20 gapping up ludicrously) I am unlikely to probe into these meaningfully.
AsiaPac region
Things have equally not improved in the East – Japan’s Nikkei 225 is now in the dangerous vicinity of breaking its intermediate-term uptrend line while already stuck in a -10% secondary market reaction. Recent high-quality leaders such as 1514.JP or 9211.JP have all but imploded, while cyclicals & other laggards continue to drift up lazily. The good times from 2023 and early 2024 are over, at least for now.
China & Hong-Kong equities have been disappointing after their initial 2024 rally, to say the least. The radical advance has not produced reliable market breadth, leading to the assumption of a largely short-covering rally amplified by European investors fleeing into emerging markets. Issues continue to whipsaw wildly, and risk is difficult to control. The Chinese SSE Composite, the CSI-300 (China’s “Nasdaq”) have now dropped below their 200DMA, while the Hang-Seng has entered Correction territory and is trying to find support of willing buyers.
Again, while money can most certainly be made trading volatility and/or short-term swings, the leading stocks are not offering accumulation signatures that volunteer to build a big line of exposure. Know what you’re doing, or wait on the sidelines – else you might get chopped up.
So long,
TGS