Hello friends,
A few weeks have passed since my last report, but not terribly much has happened. Since about mid-March, a short-term bottom has manifested and US indices have been rallying, though feebly and without conviction.
Take a peak at the volume profile of some of the popular averages (SPX, Nasdaq Comp), marked by large volume on the down-move and light volume on the rally (ignoring the rebalancing- & options expiry event on 21/3):
More importantly, few stocks (perhaps VRNA, AS, HSAI) have stepped into the power vacuum left when most of the market leaders in the US capitulated and sold off radically (as indicated in a recent brief commentary), leaving all but a few laggards and the lone pharma issue holding up.
The 2023/24 market advance was held up by an extremely narrow segment of tech leaders further propelled than the 2021 top owing to the AI hype (the ‘Magnificent 7’), while the broader growth market had been severely underperforming those glamour stocks and old-world laggard NYSE-type issues (financials, industrials, other blue-chips, etc.).
See here a comparison of the A/D lines of the ‘growth’-heavy NASDAQ Composite vs. its NYSE counterpart:
A split market, as seen here taking place since early 2021, is typically a weak market. For now, any long exposure to US equities should be severely limited to safe havens (staples, utilities, precious metals), or better, avoided. It is yet unclear which kind of market pullback we’re facing, but due to the recent exuberance, this could turn into something ugly quite quickly.
While Japanese, Australian, and Canadian markets offer up choppy trends and weak leaders (with the possible exception of the odd Gold miner), I believe the European markets are currently most valuable to look at.
A ton of indices, both on pan-European as well as national levels, are rallying strong near all-time Highs. Take a look for example at the Stoxx 50, Stoxx600, the DAX-40, or the Czech Prague Index (just to name a few):
Leading groups are mixed, but a specific standout are aerospace & defense stocks. Your watchlists should be focused on the latter, featuring the strong MILDEF, RHM, HO, THALES, EXENS, LDO, AM, SAAB-B, HAG and IVSO at the very least, and perhaps some of the slower issues from other sectors such as the Italian REVO or the Czech MONET financials. I have some positions on, and if we’re lucky, we might observe additional high-quality low-risk entry points in any of the above leaders.
Let’s hope any continued weakness in the US does not drag down with it any potential opportunities here.
So long,
TGS