Hello friends,
Interrupted by nothing but weak-volume upward blips, the markets have continued to suffer a very broad sell-off, with averages for mid-, small- and microcap stocks making 3-year record Lows over the last couple of weeks. See for example charts of the Russell 2000 or the microcap ETF IWC:
As before, action of the mega-cap stocks, which have been at the forefront of this thin 2023 AI relief bounce, has been masking this carnage. Both hopeful holders and late-comer money managers “HODL’ing” and/or buying the dip into earnings reports are exposing themselves here to a lot of pain.
Still, even the popular indices of S&P 500 (SPX) and the NASDAQ Composite are now starting to show very heavy cracks. Distribution (raised volume along downward price action) has risen rapidly (logging at 9 out of the last 25 trading sessions), both SPX and NASDAQ have cut at a steep angle through their 200DMAs (a long-term psychological barrier for institutional money managers), and worse, both have completed all stages of a trend reversal, now officially pegging lower Lows and lower Highs in a defined down-trend.
Breadth has deteriorated even more when looking at various metrics – for example, the number of stocks near 1-year Lows in price is outpacing those near 1-year Highs in price by a factor of 18:1 !!!
Earnings reactions and residual sentiment help catch popular indices
As stated on numerous occasions in these weekly market profiles, the mega-cap segment of the popular indices has been the singular reason for any perceived ‘successful stock market rally’ in 2023.
The same stocks, due to their heavy large-cap bias/grip on the indices, are now shielding the SPX & NASDAQ from looking like the Russell 2000. Specifically over the last few weeks, earnings season has once again arrived and helped catch those indices from falling flat on their noses.
Examples of such price action were both AMZN and MSFT’s earnings gap-ups:
The recalcitrance of the AI FOMO investors in this market is high, however you could easily spot that there was no true strength in these moves – MSFT sold right off in the succeeding days again, while AMZN showed a very bad close running into its down-trend line and is prone to show similar selling soon unless the next market bounce comes along earlier than expected.
Other names though did not fare so “well” – check out TSLA or GOOGL’s reactions to their latest financial reports:
Leadership deteriorates considerably
Another nail in the coffin of this market is the continued weakness in the leadership of this market.
Money has rotated between uninspiring, late-stage and sometimes defensive sectors and industries, but no new power of any is arising.
By and large, capital good- and construction stocks (recently better-performing groups) have started underperforming and selling off at least temporarily as a group, underscoring their tendency for unreliable shorter-term moves, while a lot of capital continues to flow into defensives such as the insurance industry (e.g. AJG, AFL, PGR), with the KIE ETF (broad insurance basket) within 6% of its all-time Highs in price. That does not mean though that there is anything remotely close to easy sailing here either – their slow trend nature caps reasonable upside expectations, while whipsaws on earnings can wipe out profits that had accumulated for months. Just look at KNSL below.
As a side note, gold has responded to the latest flare-up of geopolitical uncertainty in the Near East, although as good as no individual gold stocks have followed suit into strong technical positions. While the precious metal itself might make a major move in the next months or years, there is no indication of any strong stocks leading this move as of yet – and commonly, mining/exploration stocks tend to lead such a move months in anticipation.
Noteworthy action in the few remaining “leaders”
I’ve put “leaders” in quotation marks because at this point, it is really questionable to label the below stocks as such anymore. Still, their action is still our best indication of what’s happening in the market.
Long-time semiconductor leader ON has once again rolled over and is now near Jan 2023 levels – in fact, the whole group has been in a rut, best reflected by the group ETF XSD:
In the more dynamic segment, more bad action has accumulated.
Specifically, the more recent “leaders” AEHR, ACLS and RMBS (all rather questionable >20 year-old issues) have all collapsed and fallen below their long-term 200DMA & support, a first for most of these in years, and both historical and expected volatility has risen significantly (RMBS is trading at the 100th percentile of its implied volatility for the last year). Such a spike in volatility right before earnings is also observable in ANET, and in such a market generally not a good omen.
For such stocks as well, earnings are used by holders to sell into liquidity rather than to accumulate and drive price up. For example, APPF and VRT showed this very bearish phenomenon last week:
Conclusion
As before, this market is not conducive to speculating in week- to month-long positions in the strong leading stocks. Volatility and a general aversion of institutional money to accumulating stock in the face of rising prices is broadly visible, and the general trend of the market is down and/or choppy side-ways.
There is no opportunity for those seeking high-odds low risk/reward plays for such an endeavor, and only short-term swing-trading or options strategies are worthwhile right now.
Have a good one and so long,
TGS