The first few days of January commonly bring along a time of purchases on hopes for the next year, cash being forcefully put to work after end-year tax-loss harvesting, and widespread portfolio adjustments by almost any breed of long-term ‘investor‘. There were some interesting moves in the markets. Not actionable for me right this instant, but still interesting.
A quite notable rally in some metals and precious metals, which had been born weeks earlier, continued to show relative strength against the market. One could easily imagine underlying factors to drive interest here, with the dollar weakening, seismic shifts in emerging markets, equities, fixed-income securities and crypto falling apart over the last year and longer, global debt burdens at unsustainable levels, and talks of stagflation and ‘flat decades’ abounding even from seasoned from macro investors.
Markets mixed and jumpy
The year started with churning and a reversal, when prices are bid up during the day but sell off near the end of the session. This commonly suggests institutional selling into strength, not a good sign right here. This is corroborated by the fact that an average of 3.5 out of 10 index trading sessions over the last handful of weeks were of distributive nature, i.e. selling outpaced buying. The indices were relatively peaceful, due to some large speculators still being out in the Hamptons, Catskills or wherever they please.
On Friday, a relatively strong bounce could be observed widely across the markets … but again, this did not manifest much in the areas that I would prefer.
Money still hiding
Friday’s bounce and most notable action in the first week of the year was really focused on last-resort areas: Food and healthcare staples, the odd biotech, insurances, low-cost retailers and generally uninspiring industries.
Volume in most moves though was muted, potentially due to lack of the ‘big boy’ buying power. This might still come in of course, we’ll see. However, missing volume confirmation is a sign of caution that one should heed, especially in a weak market such as the one we’ve been in for quite some time now.
For healthcare, have a look at Merck (MRK). It’s a classical stock that signals money flowing into areas with stable and predictable earnings in recessionary environments. AMGN and GILD’s performance recently is a similar flag from two more biotech-esque stocks. Additionally, my screens over the last few weeks brought up such ‘beauties’ as hospital stock UHS leading rallies. Literally…
Insurance companies are leading the rally again, with stocks such as CB, ACGL, RE or TRV leading into New High ground. There was a tad bit of dumping shares in some health insurance (CI, UNH), but such was seen a couple of weeks ago and is expected in such a market.
Dynamics remain unchanged with food staples showing strength (LW, GIS, CAG or CPB). When packaged soup and frozen food stocks perk up, beware. It is not news anymore that we are in a bear market and are approaching a recessionary economic environment, but on the other hand the market does not prognosticate an impending improvement either.
More strength could be observed by ELF (drugstore affordable cosmetics), TJX or ROST (both discount retailers). Demand destruction and customer restraint continues to be priced in the market.
The stronger performance of the Dow-Jones Industrials (DJIA) and ex-US indices (check out the German DAX, or the british large-cap FTSE-100) are no divergence from the state in the US, but rather a corroboration – they are all chock full with defensives and cyclicals.
Growth remains weak
What the rally last week and on Friday surely was not supporting was anything remotely resembling new growth merchandise close to the upper end of their historical price ranges
ASO, PI, HALO and ANET had displayed strength recently, however did not follow along the updrift in the indices last week, least of all lead them. ANET specifically sold off heavily.
The same was seen in CELH and ENPH, the former’s digestion pattern falling apart and the latter now undercuting its 200-day moving average and, worse, the Lows of its previous basing structure that should have served as a price range of support. Also, note the now rising volume in ANET and ENPH declines.
Such rapid weakening of leading growth stocks is just not something that characterizes a bottom in the equity market, quite the opposite.
Even in the defensive stocks that moved up strongly on Friday or ran into New High ground recently, attraction of follow-up buying was again largely absent and restricted to few issues such as the thinly-traded ELF. Compare above TRV chart, TJ/TK Maxx (TJX), or equally so ABBV, GL, ARMK, GILD.
As stated above, the buying demand may still come in but I expect volatility and need for strict risk control when that happens.
Bear market ergotherapy
If job number one for the speculator in a bear market is capital protection and almost a degree of scepticism until an improving environment knocks on the door, job number two will be to keep the proverbial axe (read ‘watchlist’) sharp and look for those stocks that might potentially lead, whenever the market might turn into a new long-term uptrend. Whether that will be in a secular bull market or a shorter variety.
The stocks I find most appealing at this moment are very few in number, and almost all of the have some flaws. This is another red flag to me that we are most certainly not in a ‘ramp-it-up’ period.
Until recently, I would have included CELH in this list, but for the moment it will have to perform quite a feat to enter my white-board again, after forming yet another bear trap in December.
Right now, I think there are a couple of things worth watching, though not actionable for me:
1) A reviving relative strength in the retail sector. Of course, this is partially driven by discount and low-cost retailers due to recession expectations, however others such as DECK or DKS are showing an improving longer-term strength against a weak market. They do not reflect the average dynamic stock that I favor to operate in, and all of them are in weak technical positions. However, they might just be a herald for improving conditions in the months to come.
2) Some thinly-traded semiconductor stocks are still holding up, prominently ACLS and RMBS.
3) CPRX is one of the few biotech stocks that ‘chart well’ and have been lifting consistently throughout this bear market. It is not quite yet where I want it to be regarding price and liquidity requirements, but its earnings/revenue/margin growth numbers are highly impressive. If this marches on a bit, digests, and then starts moving up with a turning market, it might become a strong leader and something I will consider buying.
4) Some better growth stock ideas that I wrote before are SMCI and PI. Both again far from actionable for me, but worth watching and strong both under the hood and technically.
Time to sit back and continue watching
Overall, it appears that there is a lot of hot air re-entering the market. Due to the sell-off before Xmas, the market was a tad oversold in the short-term and we might see another temporary bounce. But the market’s weak technicals, the dearth of leadership and the absence of critical accumulation by institutional capital suggests that the path of least resistance in the months to come is still down.
Friday’s rally was thin and is probably largely related to rotation into safe havens, short-covering hedged positions and the still-present dip-buying of the retail investment community. In fact, the average speculator still keeps buying stocks that are down 50-70% in price or more. Not only buying, but piling in.
There are lots of conflicting signals and conditions if you were to look at contrarian analysis of market sentiment now. People talk bearish but act bullish. Remember that the only thing that matters is the market, i.e. the trend and action of leading stocks and indices. If the market gives the green light, nothing else it required to participate. If the market gives the red light, nothing else is required to retreat to the sidelines. But to get to a stage where you can sufficiently read the markets, you need to put in the work.
I’ve spent the last few weeks re-reading a couple of chapters from old trading classics, among them Reminiscences Of A Stock Operator, and Schwager’s The New Market Wizards. When the markets are down, it’s the perfect time to brush up on the basics. Or go over your trading log from the last 2 years, annotate your buys and your sells, regurgitate why you acted how you acted, and come up with guidelines that will improve your actions in the future should you encounter similar situations. Whatever you do, don’t dabble in the markets or try to force profits. It will result in losses, sooner or later.
Keep the axe sharp. Opportunity will arise again, and usually when the least people expect it.
So long, until next week!