Hi guys,
One of the more interesting developments of the last week was the dollar closing below its 50DMA, a previous area of support. This might be discounting a reduction or at least slowdown in treasury yield rise over the next few months, which would be bullish for equities.
We will see what happens – this might turn out to be nothing but a blip, but every large change starts as a small one. Even if, this is nothing to get overly excited about, it is one of those variables that can aid the stock market but is not by any stretch of the imagination a timing signal to enter the market.
Last week’s action has been dominated by earnings reports, or more importantly, the market’s reaction to them. Earnings season always brings in volume and volatility but can tell us a lot about what the big money is thinking.
MSFT, GOOGL, META have all blown up mercilessly – an indication of why the NASDAQ is lagging in this rally, and what might happen once the driving power of earnings season has passed. So far, bellwether AAPL has held up better than the rest of the mega-caps, a sign of strength but by itself to be taken with a grain of salt. You might abhor “FAANG” (or “MAANG” now) megacaps, but they are so very heavily weighted in the popular indices that if they break down more the same action tends to follow elsewhere. WOLF, a recently better-performing semiconductor stock did not fare well after its report either.
There have been better reactions too though, with standout performers being the food retailer WING and IoT component manufacturer PI. PI posted >900% earnings growth YOY with a 100% beat, and 51% sales growth.
I believe the market’s high-volume upwards reaction to the report was the positive highlight this week, but … it is a very thinly-traded issue, and I cannot give it a lot of weight in my analysis of current market health.
The general market
The NASDAQ, but more so the SPX and the DOW Industrials, have rallied. In fact, the DOW is leading and crossing the 50DMA and the 200DMA, while the SPX is just now in the process of crossing the 50DMA. The DOW especially is full of stocks from more ‘uninspiring’ industries, such as insurances, financials, or heavy industry capital goods manufacturers, while the usually more virile NASDAQ and growth at large are lagging once again so far in this rally.
The market at large is overbought in the short term, and a small sideways consolidation in this rally would be healthy. NASDAQ and SPX consolidating, then committedly staying above and marching beyond the 50DMA, would be a good starting point for an improvement of the general market.
However, I did not like the heavy distribution day on Oct 26 so soon into the rally – statistically, more than 75% of such rallies fail soon after. Friday was an equally uninspiring low-Volume rally on the popular indices. You want to see strong volume on up-days in a new rally.
For the moment, the intermediate term trend has turned up into at least a temporary bear market rally; the market was severely oversold until a few weeks ago, and a rally up to the 200DMA as discussed in the last report would be natural. The long-term trend though is still down, and I need to see broken down-trendlines and higher Highs/lower Lows for this to change.
Trends like this can go for a while; this one though is getting old and it is older than the vast majority of bear markets. But, that fact by itself is not more than a narrative. We’ll need to pay attention to how the rest of the earnings season will pan out, what the FOMC meeting this week will bring about, and whether good stocks with better earnings reactions can hold.
Earnings in the leaders
As said above, volatility reigns when earnings are reported. Looking at a couple of hundred charts, I am getting the same feeling as in the summer rally – few good individual stock action, and most volume in rallies comes attached to earnings reports and fades soon after.
The very positive ENPH earnings report led to some good upside, and might form the right part of a new price digestion. Great action, but isolated for growth. It is about the only pristine action I’ve seen in this rally for high-quality stocks.
SWAV broke above the 50DMA on good volume, but was immediately rebuffed at new Highs and reversed back on volume. This is anything but ideal action, and shows that the few good names are likely crowded trades, with everyone and their grandma taking a position.
I had hoped SWAV would be using the next 2-3 months to consolidate properly, but such shakeouts are normal and a digestion might still form. Earnings are due next week, along with those of fellow biomed stock LNTH – another stock that behaved well until the bear hit it, and is now chopping around.
Leadership continues to be weak
What IS leading this rally is less inspiring. Over the last weeks, I’ve seen more money rotate into commodities (energy/oil&gas), uninspiring and defensive safe havens, high-earnings stability- or high-yield stocks.
For now, let’s summarize all this. We are in a severe downtrend, new Highs are being sold into, the market is thin, erratic, and choppy, and what IS leading the market is uninspiring and reflects evasive institutional maneuvers.
Does not sound like something I want to be involved in. Any opportunities setting up in such as environment have a very low probability of working out. There is no justification to risk my hard-earned cash.
This rally might roll on for another 2-6 weeks or longer … but what can I really gain in this time, except hope? Remember that every bear market will have something outperforming, and something strong showing strong resolutions of digestions and trends continuing, almost every week. That does not mean that one should buy it.
Control FOMO
Let’s be smart and say ‘no’ when the odds are not in our favor. It’s not that it can’t work, but that the probability of success is low. By trying to find the one that might work for some limited success (no, it will not run far in this market), one will accumulate losses and stress that will offset any progress made.
Sitting on your hands is difficult, especially when feeling FOMO. But keep looking at the opportunities – or rather lack of opportunities – that this market is giving us. Are we in a raging bull? No. There’s almost no leadership to drive an uptrend, and growth stocks are collapsing on earnings reports.
In the markets, knowing what not to do is as important as knowing what to do – success is not only reflected by positive returns in bull markets, but equally so by protecting capital in hostile markets.
Rather, look at the upside. This downtrend has been long, grueling, almost torturous for many speculators. WSJ and FT are reporting that “Retail investor portfolios [are] down 44% year to date“, “Day Traders Go Back to Their Day Jobs as [the] Stock Market Swoons“, and “Global stock markets could be heading for a Japan-style bear market lasting decades“. The vocal bearishness is immense (however not the one seen in actions, yet). This market will not tear you up, if you manage risk – but it’s trying to wear you out. So don’t let it!
Rather think about the opportunity that is looming and that is getting closer to you every day; an opportunity that has historically succeeded any and every large bear market in history. It will come, as sure as the sun comes up every day, no matter how dark the night is.