A fairly choppy week lies behind us – a week for me largely characterized by the lack of anything both noteworthy and positive happening.
Action was largely typical of a slowly fading bear market rally. The market had gotten overheated in the short-term (and even now, after a few down-days, is still stretched in the intermediate term trend), a lack of strong Big Stock leaders was apparent, new Lows expanding at a ratio of 3:1 against new Highs on the major exchanges, all while a lot of people started talking about buying deep pivots and fishing for bottoms in laggard names such as Boeing (BA), Dexcom (DXCM; which digestion looks like it’s resolving negatively) or the BBH ETF.
Then some distribution came into the indices on Monday, Tuesday and Friday. The volume extent of that was not critical yet, but this pattern is slowly and steadily adding up to a tally that suggests that selling is beginning to take over.
A mixed market
Overall, many stratified indices and ETFs could be seen already tipping towards making new Lows again, when looking at the short term technicals embedded within the intermediate term trend. The Russell 2000, the S&P 600, and microcaps were all haunted by selling. The growth-focused ETF ‘FFTY’ just made a 6-year Low. This is not action that you will see in a new starting uptrend.
General market and short-term excess
More negative action was seen in the sports retailer Lululemon (LULU), which blew up on earnings after reporting excess inventories. In fact, many industries sold off hard, prominently the transports or financials.
For now, the market has worked off it’s short-term excesses. The NASDAQ has pulled back and is now sitting on its 50DMA. As alluded to in the last few weeks, we are at a decision point that I think will sooner or later resolve to the downside. Next week’s economic events might bring in another push of hot air into the markets, but so far I’ve not seen much evidence that is convincing me to believe in significantly higher upside into the Christmas period.
Right now though, the indices are nowhere near yet a stage where I would say they have found support from the extent of their moves off the October Lows. Specifically, the SPX and the DJIA are sitting right at their trendlines, and so far a reversal of the small uptrend since autumn seems most likely to me. I will sound like a broken record, but there is just nothing of significance driving this rally.
Leader price and volume action
To get a more valuable insight into the inner workings of the market, let’s look at the price-volume action of current leaders.
There is clear indication that selling is coming back into the market, or at least lack of follow-up buying in those stocks that hope to gain a foothold moving into new High-ground.
Three stocks I’m very interested in have shown very similar and negative action – ANET, ACLS and ENPH. Essentially, they had all formed faulty digestion patterns late in the rally, tried to move out on no pickup in volume, and have either already failed (ENPH, ANET) or a not attracting follow-up buying (ACLS). ACLS is very thinly traded, but I do see the action of ENPH and ANET as somewhat of a bellwether of this rally. ENPH’s shakeout was not yet accompanied by massive volume, but speaks volumes on what buyers think of a stock reaching an all-time High. Bad action.
I had been talking about how I expected very low odds of success in these setups repeatedly over the last few market profile reports, thus I was not surprised to see all this unfold.
Previous leaders SWAV and LNTH are by now 30-40% off Highs – if this rally was so sustainable, why would we be able to observe this bad action? The leaders that showed up during a bear market should lead in a rally, not lag in it.
There was some good action, namely the trend continuation in ASO. This retailer is posting negative earnings and sales growth for the moment, so likely the relative strength over the last half a year or so is discounting the future rather than the current expectation of a consumer recession.
The move was textbook action. However, ASO is merely one stock in the whole market showing good action, and also not what I would call a must-have disruptive company for my portfolio. I had been watching this stock for a long time, but I decided against participating in ASO should it move out on the earnings report. I believe the recent market action is just not strong enough to warrant me to raise exposure to any degree on the long side.
If it stays strong, I might change my opinion on it again once the market turns sustainably.
Keeping control
The other leaders FSLR, SMCI and PI (the latter being very thin) are pulling back now and might be starting what could turn into a digestion period. We will see, but right now not actionable for me.
Meanwhile, good old Campbell Soup (CPB), General Mills (GIS), Hershey’s (HSY) and many other staples or healthcare defensives are moving up, some on great volume – a clear indication that growth is not in favor by institutional money.
As a group, upside is severely limited for these names and for me as a growth speculator they are not worth chasing.
In the market, it’s not always about “This is up” or “That is moving out” … it’s also asking “Can I get in and not get stopped out while applying proper risk management rules”, and “Is this even worth getting into?”
Where would I be now, would I have entered the odd staples or healthcare chugger such as LLY or VRTX on moving up? Let me tell you – LLY and VRTX are up measly 5% and 2%, after multiple weeks of holding post their move above a low-risk entry point, and in both cases after some severe shakeouts that would have likely kicked me out at a loss.
And mind you, this was during a period where the market was in a temporary uptrend – if the market rolls over, history is a witness that even the safest safe-havens can roll over hard.
Oil weakening, possibly breaking yet?
There is finally a light at the end of the tunnel for the long commodity uptrend we’ve been in mostly in 2021 and partially into 2022. The oil& gas sector and its giants (e.g. Chevron and Schlumberger) are finally succumbing to lack of volume and the declining price of oil. While this is great to bring more fear into the markets and take out yet another straw of hope that speculators had been clinging to, the dropping oil markets are pricing in a more severe demand destruction by central banks and likely more economic pressures in 202.
Going into the next week, I expect initial sideways and subdued action on Monday and increased volatility on Tuesday onwards due to the FOMC meeting and CPI release. Additionally, the dollar has been selling off for weeks now and is due for some sort of a bounce – I expect gyrations into the small advance that gold had over the last handful of weeks, and in the equity market.
Where I am at odds is the direction in the short term. Volatility in both directions possible (as seen over last few months) but however the composite picture of market health suggests that the long-term trend of equities will stay that of a bear market.
Don’t fall in love with your past pet stocks
I believe it’s most critical to keep a level head when analyzing market rallies such as the current one. People do want to join in, to make profits again, to dollar-cost average (which I think is a problematic notion based on a superficial understanding of how markets work), to be right.
So they look at indices, which can have quite violent moves in the inevitable bounces that bear markets bring with them, and use them as a justification to start buying more of their favorite stocks from the previous uptrend.
As Jim Rogers said, “Generals always fight the last war, and portfolio managers always invest in the last bull market”. This holds true, as people have an emotional buy-in to stocks that treated them well or companies they personally like.
However, you can look at any market bottom in the past – be it 1954, 1962, 1998 or ’99, 2003, 2009, 2020, or any other – new bull markets are always led by new stocks.
I will wait for these to show up before I call a rally trustworthy, or this bear market over.