Hello friends,
I planned my wife’s and my Asia vacation just in the right time when a first leg of the (at least by me) much anticipated sell-off of the strongly extended and thin rally in the popular indices occurred. The markets were struck over the last few weeks by an array of news, including US gov and bank credit rating downgrades, reports from the inflation and labor front, earnings reports, the endless slew of negative news from China, or the infamous Jackson Hole symposium.
Quite frankly, none of those truly matter to the in a causative context, but they may serve as catalyzers to initiate certain moves.
Let’s look at what really matters to stocks – price, trends.
Since NASDAQ-type mega-caps had been the prime movers propelling this rally up, it makes sense to look at how this index has fared over the last couple of weeks. As you ca see in the chart below, the NASDAQ Composite has sold off with heavy volume bars (35-40% of the trading sessions over the last month recorded heavy downside volume). This was met with feeble and dropping volume over the last week’s rally, which is pegging all the hallmarks of a dead-cat bounce so far.
Details matter.
You can bet your last shirt that the FOMO trader and money-manager community will have used the last 2-3 weeks to buy the dip in various issues. This might lead to a larger bounce than what we’ve seen the last week, but here I’ll lay out why for those speculating in strongly trending leading stocks, it’s time to sell the rip rather than to buy the dip.
Market internals degraded radically
A strong market is led by a large set of strong issues, which is pretty much the opposite of what we’re seeing right now.
Stocks making new 52-week Lows are once again outpacing those making new Highs. This has been true for most of the bear market since Jan 2022, with a few exceptions during the spring and summer bear rallies. While in 2023 stocks making new Highs ticked up somewhat, this was largely due to cyclical money rotation, and absolute levels of this metric remained below really worthwhile levels at any point in time:
NASDAQ (and its pseudo-sister SP500, considering their mega-cap bias) has started pegging lower Lows again after dipping below and finding resistance (along the NVDA earnings reaction) at the 50DMA zone. Though a technical level, if enough people believe it is significant, it becomes so as a self-fulfilling prophecy.
Worse, this move is confirmed by virtually any market segment index and most group ETFs, spanning large- to mid-, small- and microcaps. The latter three have now reliably rejected their attempts at trying to reverse their long-term trend to upside, and are back within their choppy trading ranges.
Worst fared the small- and microcaps, that never really had a chance to follow NASDAQ and SPX in breaking their down-/ sideways trends. See here e.g. a chart of microcaps (IWC), a risk-on indicator for the market, starkly emphasizing the mega-cap bias of this market:
In fact, microcaps have continued making lower Lows all along in 2023, masked by the popular index rally.
Sentiment indicators such as bull/bear ratios or the VIX (the “fear gauge” of implied SPX options volatility) were strongly over-bullish for months, and despite the recent almost 9% selloff on NASDAQ they have not nudged up significantly. This is unsurprising considering the recent euphoria in the markets, and more downside is necessary to shake this significantly.
Right now, the market can be seen as in a secondary reaction or a short-term pullback, depending on the index one chooses to look at. In any case, the time of the smooth rally driven by a constant bid underlying the mega-8 stocks is over for now.
Leadership enriched with uninspiring cyclicals and “value”
Poring over charts spanning the last month or so, it becomes obvious that selling has not been limited to technology stocks, which received renewed attention due to their exposure to AI. In fact, selling has taken place broadly across the market, and most stocks worthy of being looked at have been depressed ranging from a magnitude of ‘somewhat’ to ‘substantially’.
Industry leadership has largely remained unchanged – capital goods, heavy machinery, industrials, electricals, construction and homebuilders (all cyclical “value”), as well as defensive healthcare equities have remained the most bought and least sold issues, however not on significant systematic accumulation. This gives continuing support to the thesis of a large-scale “flight-to-safety” by significant amounts of institutional money.
The one group that was previously leading and is now keeling over are the airlines (‘JETS’ ETF), throwing cold water one the buy-low-sell-high crowd.
In any case, there were no developments here that made you sit up straight in your chair. Even within these rather uninspiring industry groups, there were no signs of any arising worthwhile leading stocks chased by the smart money.
Individual stocks continue to sour
Bear market bottoms are usually paired with rampant volatility, and can transition into new long-term up-trends within a very short amount of time. Tops however by and large have a tendency to be protracted and dry affairs challenging your patience and sanity.
So it is here. Although there are notable blow-ups and negative action all across the segment of more ‘watch-worthy’ stocks, rolling over takes a while, and we won’t be able to tell the future winners from the losers until the time has come. Patience remains key, as you can see in the case of NVDA, which holders refuse to bail though upside is limited, and new Highs and a blow-out earnings report and guidance were met with selling under the hood.
Notice the highest weekly volume in years paired with churning/reversal price action. Not a good sign, even less so considering this is the “all-eyez-on-me” stock of this AI rally. Similarly-themed AVGO is showing the same price action, and will go into earnings in a few days as well.
Looking at some of the mega-cap tech stocks that have driven this thin market rally for most of 2023, the sudden change of character a few weeks back has only seen more confirmation.
AAPL and MSFT kept dumping after rejecting al-time new Highs, both now stuck below their down-curving 50DMA.
Among the more interesting issues of this market, SMCI, CAVA, IOT have shown equally bad action, negating new High price and overall showing a trend of systematic selling. Not all these charts are catastrophic, but price will have to work through a substantive correction phase at the very least.
There are a couple more stocks that are hanging in there on bare threads (e.g. ANET, ACLS, AEHR), but as a group they are simply not many enough to suggest money rotating back into risk-on equities at this point.
I am following VRT, RXST and CELH with interest. CELH has already staged a monstrous run, but keeps very strong despite the market weakness. The other two are two newcomers to this market, VRT being liquid as well. A few of them might just become new market leaders once this market turns reliably. But we are still far from that as of now.
International markets signal global risk-off attitude
The weakening environment is largely reflected by other international markets. While India and Turkey remain very strong (in the latter case obviously due to runaway inflation, and the indices suggesting it is time for a digestion), European and Asian markets are largely acting in tandem.
Japan, probably the strongest proposition for the last year, has severely weakened – the best leading stocks have sold off, and laggard stocks and late-stage industrials are starting to lead. Caution is advised. Similarly in Taiwan.
China is in a league of its own. Literally every single piece of government and economic news, prominently the government measures to support the market and the economy, have led to a brief gap-up on the Open followed by severe selling (see below the SSE Composite) – not a sign of market exuberance.
The bear porn has become ridiculous, but I believe it will get worse before it gets better. Not at least because the Chinese government has a bad reputation from withholding bad economic data from the country until it just can’t brush anymore poop below the carpet. I think the watershed moment is about to go down.
Tread carefully, I don’t think the market environment warrants any long exposure at all at the moment for those trying to capitalize on strong trends in strong stocks – Cash remains King.
So long,
TGS