Hi friends,
US equities have slipped back into a Groundhog-Day dynamic. Every day is up, the same stocks are recommended to death by the talking heads, and there’s a general feeling of complacency among the dumb money. Right here, the old tech leaders from the last decade lull many stock buyers into a false security, some of them trading within 1-3% of all-time new Highs. However, selling volume has overall been heavier on down-days over the last 1-2months and the amount of stocks making new price highs is consistently anemic. Euphoria is setting in, and the markets (or rather, human psychology) never cease to amaze me.
Following last week’s report, the SP500 has now decided to join the rally and confirm NASDAQ’s move. The problem is that they’re both mirroring the same bleak leadership, and though Friday’s rally was broad across mid- and small caps as well, there’s just no confirmation of this grand move in the bigger picture to be had from other parts of the market.
The crowd is right, until it’s wrong
The most crowded bets at the moment are US Big Tech stocks, Chinese equities and European large biopharmaceuticals (the latter being a defensive play). As if on cue, Chinese equities have started chopping heavily and indices are on the verge of rolling over. Meanwhile in the US and Europe, the party is getting old, but no serious drunken brawls have started. The air is starting to smell of stale beer though, and the cool people have left a while ago.
SPX and NASDAQ (which the media want us to believe to be representative of “US equities”) have been rallying quite impressively these last few weeks. As I wrote previously, this is almost exclusively driven by a narrow set of stocks whose companies are expected to profit from a growing stake in AI. Add to this a large amount of institutional short bets that are increasingly being squeezed, and you get a nice hot air balloon that can rise higher than most would believe. But hot air it is, and mostly nothing more.
There are two sides to this – narrow markets are weak markets, especially when the main drivers are exclusively blue-chips from the last few decades. On the other hand, thin markets can still be very profitable, if the right opportunities present themselves. Recall that the biggest money in the dot-com market was made in the last few months before the wave finally broke, because great stocks continued to come out of the woodwork at low risk/reward ratios. Thus one should not become dogmatic and reject such a thin market outright.
However, as we make the real money in stocks and not in indices, the final arbiters of whether a market is tradeable or not are always opportunities in individual stocks. I’m not talking about FOMO’ing into NVDA, AAPL or MSFT here – but true leadership.
Here too, Groundhog day is in action – same old stocks, no new merchandise, no low-risk opportunities. A lot of volatility, and lot of chopping, but profits to be had at low cost to the speculator remain a mirage.
Volatility is spiking
Price moves in both directions have become the norm of late – aged leaders like ANET and AEHR are chopping, breaking below support, just to rally back to old highs in a brief amount of time. This is paired with stocks experiencing selling or lack of buying at new price highs (even, or especially, among the more blue-chip names such as PANW). Such is kryptonite for the formation of sustainable trends, which we need by definition to make money in stocks (unless you like to trade volatility using derivatives, which I do not recommend unless you are a seasoned pro).
Semiconductor stocks have taken center-stage lately, with old horses like NVDA or AVGO in the process of staging parabolic moves that we probably won’t see again for decades, if ever. Computer hardware stocks such as ANET, PSTG or the leading SMCI have experienced heavy trading activity on a wave of sentiment carryover, but so far no actionable high-quality setups. Price-volume action in these stocks does not suggest systematic institutional accumulation (at least not yet), but rather dynamics typical of exuberant markets without much substance. In others (e.g. SMCI), buyer exhaustion and stock distribution into the hands of the public is apparent.
These are all indications of a late-stage market, and thus a negative sign for the time being. Of course, we need not be dogmatic and always try to adapt to new evidence arising. The market could improve significantly on a whim, and in 3-4 weeks the picture might have turned to something benign. But right now, there are barely any signs of that happening soon.
There’s always something moving …
… but we need to remember why we’re in the markets. Are we here to chase every skirt, just to be burned over and over in bad short-term relationships or one-night-stands, or do we invest the time, effort and compromises to build a long-lasting and blooming marriage?
To make money consistently, we need to build a sound and proactive strategy centered around risk management, and apply it consistently. Jumping on whatever moves today and hoping it will continue tomorrow is reactive, and not a strategy. Sure, stocks like SMCI look impressive in hindsight, after the fact. But if you really scrutinize the chart and the rally starting in late 2021, you will see that you could never have sat in this stock using a coherent system of risk management (including the possibility of a purchase right now) – volatility and general price-volume action was so malignant that low-risk entry points never really appeared.
Overall, the big volume keeps getting attracted to two things at the moment – distribution and selling, for example in climaxing stocks like SMCI, or amateur gambling in a large number of lagging low-quality AI craze stocks, including but not limited to AI, OPRA, DT, SYM, UPST, PLTR, and others.
All this is occurring while virtually no high-quality stocks are in strong technical positions. This alone is sufficient to justify that staying out of this market is the most rational course of action right now.
Those that jump on bandwagons to move forward will inevitably conclude that an even better way to do so is to jump off a bridge onto a speeding train. They might get lucky 1, 2 or 3 times, but over a course of 5-10 years, if they even last a tenth of that time, people chasing the obvious late-stage stocks will be run over, chewed up and shit out dead by the market.