The market has arrived in a somewhat dull moment, that is interrupted by temporary volatility in form of economic numbers, Fed statements and earnings reports. Indices have been trading in a range since October, and so far I see no reason to believe the long-term downtrend will resolve itself to the upside soon.
Conditions for a bottom have not been met
I always try to not get too fixated on my own opinion, and rather let the market speak. And that is exactly the problem. While leaders break, uninspiring stocks and industries continue to dominate the podium of leadership, even if doing so with a lack of vigor.
US equity markets are in a very stubborn bear market bounce, however the metrics looking under the hood do not suggest a frenetic run into equities now that inflation is cooling. In fact, renewed interest in precious metals paired with a leaderless market and relentlessly complacent speculators begs the question “Do we need to see some sort of black swan event to bottom?”
I don’t like fearmongering, nor do I wish any of the following things to happen. But speaking strictly in terms of the stock market, something unlikely along the lines of a major rhetorical or factual escalation in the Russia-Ukraine war, or the US temporarily defaulting on part of its debt obligations might bring the conditions of a positive market reversal with it.
Goldman Sachs believes that post the debt ceiling being hit last week, the risk for at least a temporary default is greater than in the last almost 30 years. I think the wrist of the government being slapped with this could be a necessary evil to endure to improve the ever-spiraling debt burden of the US. As statesman Benjamin Franklin said, “Rather go to bed supperless than rise in debt”, because unrestrained government debt is a central factor in exacerbating the long-term trajectory of inflation.
Indices chop near resistance levels
The week lifted off with a heavy-volume churning and reversal of markets after seeing the most extreme and unsustainable short-term extension state that my benchmarks had posted for decades. Wednesday to Thursday markets sold off heavily, while on Friday the was some sort of a rally on rising volume.
The NASDAQ Composite, despite being the weakest average over the last year, has shown some interesting signs of accumulation lately (see volume in below chart). This is noteworthy, but by itself not sufficient to tip the weight of evidence towards a new bull market.
Overall, caution is very justified. Bull markets start with an unmistakable roar despite strongly negative sentiment – right now we see the opposite, a flailing rally along over-bullishness. Averages have come down a bit from extreme extension levels, but because a strong uptrend has not established itself since October, the pendulum swing down should be expected to be as strong as this short upswing.
Wednesday’s and Thursday’s selling does not quite yet qualify as what I call an enabling shakeout followed by support, an observation that is a baseline observation in sustainable rallies. Risk remains high in this wobbly market, which itself is still in a weak technical position.
Noteworthy industry moves are in the wrong places
Continuing from above, Gold and Silver (and also “industrial” precious metal Copper) keep digesting and hold strong after an initial upswing. I previously commented that it is still too early to say with conviction whether this is a new trend, but this might just reflect money managers hedging against monetary/fiscal problems or geopolicital escalations in the future.
The copper stock SCCO is the strongest of the bunch, but again it is just in the process of attempting to reverse it’s long-term downtrend. After the current down-trend line break, a constructive digestion and a high-volume advance would give a bullish signal for me. I might venture into this on a smaller probing position, as there appears to be group confirmation from sister stocks COPX and FCX, albeit on lower volume. SCCO is the copper leader at the moment, but my participation is predicated on the general market, which is still precarious.
I will tread carefully, especially since other commodity stocks such as steels can be seen to meet price advances with low volume and thereafter immediate selling (e.g. TS, HWM, CMC).
Furthermore, oil stocks have started leading again (SLB, XOM, CVX), or at least continue to hold despite the strongly dropping oil futures observed over the last few months. Again, this could signal that certain geopolitical tensions are expected down the road. It does not really matter why though, the fact remains is that I don’t see many oil stocks in strong technical positions (price volume behavior) and thus the sector does not meet my criteria for risking capital, especially not in a hostile market.
Money rotates in and out of certain industries
The selloff on Thursday was, among others, led by many defensive-type stocks. This is a great sign for the market in the long term. Classical staples PG and CHD sold strongly, followed by tobacco, utilities as a group, and especially food stocks that had been leading recently (CAG, KO, PEP, CPB, GIS,…). Insurances however continue to lead, despite some hickups (e.g. UNH).
This would be great, if their position was replaced by better-grade securities. However, many of the currently better-performing stocks also took a severe beating. Semiconductors were symptomatic of a low-volume rally and lack of follow-up (shown by group ETF XSD or the stock LSCC, or KLAC and ASML rolling back from piercing pivot points).
While the liquid semi stocks could not get up at all, the small rat-pack of thinly-traded semiconductor stocks keeps holding strong (AEHR, RMBS, ACLS, AMKR, ALGM). AEHR and ACLS are my favorites of the group, and I might change my previously negative opinion if price action warrants it. However, AMKR and ALGM are already showing first holes in the hull, breaking slightly and not rallying with the NASDAQ on Friday. Only continued survival of the next couple of weeks will truly make me interested in this group. As of yet, they could either be leadership material, or the last men standing.
As well, the industrial stocks that had been doing well in this rally that was driven largely by the Dow Jones Industrials (DJIA) are showing first cracks. DE broke hard, followed by HON and PH. CAT, the leader of the group, is still holding its move above a digestion, but the volume on Thursday’s selling was heavier than any day for the last few weeks, including the day of the move above the digestion. Such stocks that drift more on ‘macro’ currents don’t always need volume though. However, itself CAT cannot herald a new bull.
Solars were dumped heavily (see TAN, or e.g. SEDG, ENPH), and ARRY whipsawed heavily when attempting to move out of a faulty bottoming digestion pattern. This was followed by “war stocks” (e.g. LMT or NOC). The later is a cross-current to the ‘geopolitical tension’ hypothesis from above. This shows again that opinions truly don’t matter, only the action that the market presents is important. I know better than to put my money on purely fundamental opinions.
Earnings reactions mixed so far
Not too many reports are out yet, since last week was officially the kickoff of the earnings season. However, I found Goldman Sachs (GS), Schwab (SCHW) and Interactive Brokers (IBKR) most insightful. Financials usually do well at some point during a monetary tightening cycle. However, GS and SCHW imploded on the downside, while IBKR tried to move out of a loose digestion pattern but couldn’t yet attract follow-up interest from buyers. GS showed cruel negative surprises in its report, but SCHW and IBKR’s growth was not shabby. All again symptomatic of the market environment.
Next week a few interesting reports will surface, and hopefully shed some more light on the composite expectations of the investment community on the respective companies and their financial performance.
“Fair weather” stocks suggest storms ahead
There is not much to add to my comments from a few days ago on important leaders breaking all over the place.
Recent wunderkind SMCI tried to recover to its 50-day moving average after suffering a severe blow, only to be immediately rejected by it and heavy selling causing an implosion to $70. SMCI is now following into the footsteps of LNTH, SWAV and ENPH – all recent high-grade prodigy stocks that were bashed to death by sellers. This is one of the main reasons showing that the bear remains intact.
Meanwhile, CELH started chopping around, forming erratic price action around support. It’s chart looks now damaged at least for the short- to intermediate term.
My favorites remain with CPRX, PI and MBLY, which I’ve discussed in the last few reports. They show fundamental quality paired with a strong technical position, and I expect them to lead whenever a new bull run ensues. That is, if they are not clubbed to death, as many other leaders have been already.
A few words on keeping a level head
Markets such as the current one can cause quite a large amount of FOMO in the amateur. Trust me, over the years I’ve been there more often than I care to admit. The key to successful speculation is to only wager your capital when the odds are in your favor.
A corollary of that statement is that when all over the market, great stocks show a number of great opportunities, I as a speculator in stocks will not need any other reason to decide whether to risk my money to make profits. And if I see the opposite of that, then no other justification is needed to keep protecting my capital.
We must at all times be aware that fear will be high around market true bottoms and we will not be inclined to expose our accounts to risk, after having been conditioned for months or years to stay out. That means, when there will be a great opportunity looming, I will make every effort to not hesitate in capitalizing on it.
But …. I don’t see any factual evidence that we are about to enter a great market, or have witnessed a true market bottom. Trying to be first in such a market can be very costly when there is no clear direction opening up, and stocks are not jumping at you from the charts.
I will remain cautious and skeptical on this rally, until I see the weight of evidence shifting in the other direction. As always, I could be wrong, so I will remain mentally flexible. However, I will allow my convictions only to be overturned by the market and the opportunities it shapes up, not by my impulses.