Hi friends,
Markets remain choppy and stocks difficult to trade while properly managing risk on the long side.
China & Hong Kong
The strongest opportunities at the moment appear to lie in Chinese and Hong Kong equities, which indices (SSE Composite, Hang Seng) have staged strong rallies into higher Highs in the intermediate- and long-term trends:
There are a lot of strong stocks rallying, many of which are not tradeable for non-resident and non-institutional investors, but there are some crumbs available – take a peek at 603556.CN or 2145.HK, for example. Trouble is, Chinese stocks tend to trade quite erratically overall, despite usually strong liquidity. In any case, it’s advised to stay on the lookout for good opportunities when low-risk entry points form – right this moment, there are none available.
Japan deteriorates further
As indicated in last week’s report, Japanese stocks as a group have severely deteriorated. Despite a relatively broad market move across groups, the market is largely drifting and led by laggard-type stocks, while the indices (e.g. Nikkei 225, TOPIX) are in a secondary reaction which has yet to show which direction it will resolve. Suffice it to say that there are few to no strong issues are still holding up. While over the last 1.5 years my watchlist was stuffed with virile stocks, it is now almost devoid of strong leaders behaving well – most of the latter have collapsed (e.g. 6254.JP, 4761.JP, 8104.JP, 4894.JP, 9211.JP) or are showing price/volume patterns indicative of distribution (e.g. 1434.JP, 4980.JP, 9343.JP).
There are no convincing reasons for me to assume any risk here right now.
Digestion failures and pullbacks in European stocks
Similar to the US and the UK, there is a progressing divergence forming between indices and individual stocks. While the latter (especially the large-cap focused ones) continue to rally into new Highs or at least back to old Highs (e.g. check the STOXX 600 or the Euronext AEX index), indiviual stocks show problematic price/volume signatures.
For example, in my humble opinion most probably the single best stock right now across Europe, GUBRA.DK, has reversed miserably after moving out of an immaculate digestion. There is a tiny chance that this may yet turn again to the upside, but a whipsaw of 12.3% from the pivot and 20.7% from the Highs is a clear sign of missing support, often preceding more downside or at least continued choppy trading. Though the stock still looks strong, risk management again remains highly problematic.
The other stronger candidates, including the Polish SNT or the Danish ZEAL have pulled back severely, neither displaying superb price/volume character and logging increasing number of sessions with increased selling bouts.
US continues to be led by laggard cyclicals and choppy trading
While the NASDAQ Composite (COMP below, ignore last 4 volume bars) has finally managed to break through the 16,450$ price level from which it had been rejected a whopping 6 times, the rally here and on the SP500 has been on weak and dropping volume, as shown in last week’s report.
Now there’s been a break into new Highs by the NASDAQ Comp, confirmed by the S&P500 (which by now is literally just tracing out the same top-8 mega-cap Big Tech stocks that drive the NASDAQ) but not confirmed yet by small- & mid- and micro-caps (Russel-2000, Russel IWC). In essence, the Magnificent-7 stocks continue to drift up along cyclicals, defensive issues and overall sentiment while the rest of the market is stalling in a choppy fashion.
There are a lot of ludicrously extended names (e.g. the Utility stock VST or travel stoc MMYT), but the strongest issues leaders overall attract weak volume and few follow-up buying near critical supply/demand junctures. Recently most of leading stocks have failed and/or pulled back heavily (a list here) have failed, while few others are stepping up to the place (e.g. the more thinly-traded RXST as an example).
Leadership is thin, and the best stocks of the market are not heading up in price in a way that they could be traded with proper risk management – the US market remains a no-go zone for me for now.
So much for today – keep an eye out on those Chinese issues, and tread carefully everywhere else. Good times will return eventually.
So long,
TGS