Dear friends,
The US marketplace is always ready for a good drama – if it’s not bank insolvencies or the debt ceiling, then there’s a FOMO rally somewhere. In this case, it’s quite an obvious one, very much too obvious.
Market thin as a needle eye
The NASDAQ Composite, and especially its little twin the NASDAQ-100, have staged quite a rally in the last few weeks, driven almost solely by eight mega-cap stocks that are being run by amateurs and “professionals” alike to staggering heights on Dickensian great expectations on AI.
While the amateur is salivating on the future of generative AI, I can’t help but feeling reminded of the dot-com era, where stocks ran up on really nothing but FOMO – a single mention of the internet and “.com” announcements would bring in a frenzy of buyers. This situation here to me looks very similar, as pretty much any tech company is promulgating their intentions to put AI to some use, and speculators are responding by throwing their cash at these stocks.
The problem is that these eight Augustus Goop Bros make up the majority of the rally in the indices, while the rest of the market is slowly sagging back. They make up about a quarter of the S&P500’s movement at the moment, which is really quite something since 8/500 companies is 1.6%. Pareto would be proud.
As impressive as the NASDAQ rally looks, a few weeks ago it was already thin as a paper. Now, it is narrower than a mineralogical thin section. This doesn’t mean that it can’t melt up further and pull in more amateurs and their capital, but it certainly isn’t the basis for a new bull market. A complete lack of confirmation of this move by other indices (and individual stock leaders) is another nail in the coffin. While the cap-weighted and mega-8-cap sensitive S&P500 (SPX) is YTD up over 9%, the equal-weighted S&P500 (RSP) is down 1.2%. While the Nasdaq QQQ ETF is up 37% since the October Lows, the Russell 2000, more representative of the risk-on bracket of the market, was only begrudgingly dragged up a meager 8%.
While thinning markets can still be money-makers, this is here not the case, as no strong stocks are showing up.
Note also the declining and overall anemic volume on NASDAQ and SPX. In parallel, the breadth of the market has again gotten worse – while the NASDAQ and SPX edged up, A/D lines (cumulative stock movements of individual stocks) and the NYSE Composite (NYA) have moved down.
AI FOMO
While the market has been rallying on liquid mega-caps for a while now, the impetus for the last few days came by NVDA’s earnings report, guidance and subsequent gap-up of the stock into all-time new high price levels.
This rally, although to much lesser degree, has been picked up across the semi-conductor industry on wild sentiment spillover (e.g. AVGO, AMD, MPWR, RMBS, PLAB, ONTO, etc.) and renewed interest in the old malaka-rallies of pure and lateral AI plays – AI, IONQ, PLTR, SSTK, UPST, NNOX, APLD, etc.
None of those are actionable stocks, some old and played-over, others old, uninspiring and extended or choppy.
Individual leaders chop or climax
There are no good and reliable leading stocks left for now – the recent one-hit wonders have started keeling over or distributing heavily (ASO, ALGM, AEHR), choppiness has become extreme (e.g. ANET, MBLY, PI, etc) while digestions in better names are resolving negatively (LNTH, SWAV) and already-extended names are moving out unsustainably (RMBS, SMCI) or on low volume (MBLY, ACLS, the latter still the best stock left overall). In fact, SMCI is a classic stock in its topping phase, staging a climax run over the last handful of weeks. Distribution is likely to ensue soon in this choppy stock that a long time ago started distributing under the hood and shook out any risk-managing speculators.
Looking east
There is really not much more to say – the US market is a heap of poop with whipped cream on top. Despite the heavy FOMO-inducing volatility, no individual stocks are behaving healthily and odds of whipsaws and unnecessary losses are skyrocketing. I continue watching from the sidelines, but have my focus turned elsewhere for the moment.
Chinese equities and the SSE have also begun rolling over – a couple of stocks are holding, but the March/April/May attempts on a trend reversal have failed.
Meanwhile, the Japanese market has started offering good or even great returns to speculation in stocks. If you can drop your dogma against entering foreign markets and your broker supports such endeavors, take a look at a couple of ideas I’ve posted recently, and also the below ones:
Waiting for a low-risk entry point is a must, but the volume patterns in many of those are nothing short of amazing to behold, especially for someone awaiting big opportunities.