Hi friends,
Earnings season combined with the dog days of summer is turning the markets into a generous chopfest. NASDAQ and SPX, largely driven the mega-cap tech stock AI hype, has had a heavy reversal on Thursday, the latter widely attributed to Bank of Japan-linked yield increases in longer-maturity securities.
Although on Friday, prices gapped- and closed up again on the popular indices, I invite you to look at the volume. Heavy on the downside, and weak again on the upside. Remember that volume on the exchange indices behaves like the global sea level – you require tremendous increases in order activity to just increase the volume by a few percent. Though not catastrophic, the downside volume was high. In fact, NASDAQ has suffered heavy selling in 6 out of the last 25 trading sessions – indicating distribution, despite the rising prices.
Many of the indices and ETFs (e.g. the more risk-on IWO Russell Growth ETF) which are in the process of trying to confirm the rally many months later (already an ominous sign) are sputtering at the breakout reversal point (red line below):
This may or may not improve and keep heading higher, however in the wider context of the thin market and absence of strong leading stocks, as discussed in virtually every WMP since last year October, this does not represent a major rebound of the market’s quality thus far.
Overall, there is a clear dynamic overshadowing all the bullish propaganda blow into our face from virtually everywhere – there are as good as no high-quality leading stocks anywhere to be found, and there is no follow-up demand in stocks observable at critical junctures.
Leadership indicative of late-stage market
First voices are abounding that inflation might have a rebound in 2024. A couple of commodity futures, prominently copper, steel, crude oil & gasoline, have brought the CRB commodity into a rally that might indicate a reversal of its down-trend. However, this is a very early development and we should not read too much into it – however, still noteworthy.
So far, cyclicals typical of a late-stage bull market and monetary tightening are outperforming in the intermediate-term – financials, Industrial/electronics/construction. All of the names that are outperforming are uninspiring sluggish cyclical movers from another era, reflecting large mutual funds rotating their money from sector to sector, rather than systematic accumulation.
Earnings reactions widely mixed in the blue-chip darling segment
Price action following financials reports has been lukewarm so far. I could rattle off a barage of names and describe how their stocks reacted on the numbers, but the overall message is the same – there is no clear message as of yet, except that there downward guidance seems to spook a lot of fundamentally-oriented holders.
One of most awaited ‘all-eyes-on-me’ reports last week was Microsoft (MSFT), which gapped down on the report, after a few weeks of largely negative price/volume action and rejecting buying demand into new High prices.
This is not great news for this thin market that is largely predicated on more and more people throwing their money at the obvious mega-cap big tech stocks with AI exposure, most of all MSFT.
We will yet see how the market will react to AAPL’s earnings, set to report later this week. The latter is the single most-crowded trade on the planet, and together with Microsoft and a few smaller names almost exclusively responsible for this thin 2023 big tech rally.
Leading stocks still fumbling in the dark
As much as I’d love to bring in some new content and names in this section, there just isn’t anything that has changed materially since I discussed it lengths previously.
The bottom line is, despite all the hype brought about by the Wall Street machinery loudly shouting the news of a new bull market from the rooftops, there simply isn’t a whole lot of merchandise that is worth risking any serious money on.
There is an array of important stocks reporting earnings soon (e.g. ALGM, PSTG, ANET, RMBS, IOT, SMCI, ACLS, CELH, LNTH, SWAV), most of which are in quite weak technical positions or have given up leadership a while back. I expect some major volatility to surface in many of these names, but there is no reason to assume that even bad reports will bring a halt to this market rally.
In any case, suffice it to say that the only recent digestions in leading names (and there really haven’t been many in the first place) have resolved negatively and failed to attract follow-up buying demand – I would tread very carefully going into these earnings reports.
Similar action is visible in the low-quality department of past and collapsed stocks (e.g. PLTR, BILL, DT, SOFI, CFLT, …) that are being pushed on social media by various gurus and self-proclaimed experts. I won’t go into too much detail here, as this would resemble bad practice on my side, but again suffice it to say that those crowded names cannot attract follow-up buying and are nearing their respective earnings dates with weak technical positioning.
Take WEAV and SYM as examples – while WEAV is sputtering moving out of a very strong (but still highly problematic digestion), SYM is experiencing very strong volatility will most likely go the way its sister stock OPRA has taken a few weeks ago:
The overall picture remains bleak – despite widely pushed bull propaganda concerning the new bull market on the coattails of generative AI, there is not that much substance to the market. This is less a bearish stance from my side than an ineptitude to take a bullish stance – there is simply nothing much to be truly bullish about.
Other marketplaces
If there’s not much to speculate on in the US markets, perhaps it’s a better idea to look elsewhere?
The standout opportunities of the moment are clearly Indian and Turkish equities – both difficult to trade unless you are an institutional client or have citizenship, and thus not much value for most of us.
Japan, since October last year one of the few great money-making opportunities, is starting to sputter, despite the recent announcements of the BoJ that yield-curve control and QE will largely remain untouched. Many of the previous growth leaders have rolled over, and although a few remain, a lot of cyclicals are starting to appear on my screens and I have paired back exposure strongly. There are still a few better stocks holding up well, but the tone of the market clearly has changed for the moment. Right at this juncture I recommend taking a step back and re-evaluating – can current setups gain traction and follow-up buying? I think in a week or two, we’ll know better.
The Chinese indices (CSI-300, SZSE Composite) are following through on strong volume and price gains after their recent politburo news, however I fail yet to see strong stocks offering strong entry points. Frequent screening will be a necessity to catch the best fish, but so far I have not seen confirmation of the news hype in individual stocks.
It’s a precarious time – tread carefully, but remember that stocks can and often do climb a wall of worry quite well. The real question that matters is though, as always – can you make money? Can you find exceptional stocks signalling a turn in the market? This should be your main criterion to dial exposure up and down.