With the hot air in this rally we could have blown up a balloon the size of Mount Everest. Another extra-committee speech by the Fed chairman on Wednesday led to markets rallying absurdly from likely more short covering, more than 4% on NASDAQ.
The Fed used to only speak at FOMC press conferences, and only say what they would do currently. The times have changed, and Fed officials are closer to market celebrities by now, delivering forward guidance and giving talks here and TV interviews there, with almost every comment moving the markets. This pushes additional volatility into the markets, and the week after this we can expect more of it with inflation data and the actual FOMC meeting.
However, Wed’s speech really did not bring that much new information beyond what Fed officials had offered to the public before, so what was the market really rallying on so hard?
Last Wednesday was also the MSCI semi-annual review, an event that is widely ignored by media coverage but swells up volume by gigantic amounts every time it occurs; to me, it’s as important as triple witching.
Traders overcommit, dollar weakens more
In any case, Wed’s volume was skewed massively and led many growth speculators to commit more heavily to this overheated rally. At this late point a mistake, I believe.
The dollar (DXY) has now broken its long-term 200DMA support, which is good for the longer-term picture in equities but, again, it should not be taken as a timing signal. While the Wed rally could be construed as a good sign in itself, the absence of participation on Wed and more so over the last 1.5 months still keeps my stance rather bearish on this bounce.
Newsletters and outlets suggest FOMO’ing in
I believe people are getting ahead of themselves, jumping at every straw that they can grasp at. Investors.com, the most conservative paper among the bigger outlets, stated to their readers that the TAN ETF, DXCM, BA and SQM are all “actionable now” – all of which are in choppy or faulty digestion patterns, and most show considerable overhead supply. A lack of opportunities is a lack of opportunities …. is a lack of opportunities.
While I’m not fundamentally against some of the ideas (TAN contains FSLR, ENPH, both what I believe to be strong stocks), none of these setups have good odds to succeed until this severely overbought state has been ironed out of the market. Buying stocks moving out of digestions so late into an extended rally is begging for a shakeout.
Some newsletter services are discussing the ‘2 months back to back in the green’ as a herald for promoting that the bears are back in hibernation, others discuss a ‘new normal’ in which we do not see classical bottoming signs anymore for the market to move. The old ‘This time it’s different’, mixed with a too-big pinch of desire. The VIX is at 19 lower than it was in summer. Keeping in mind we are in an extremely thin and extended rally, this is a bad sign – complacency is rampant.
For those that argue the extended upside of the DJIA is enough to call this bear over – I’ll gladly remind you that the 1929, 2000 and 2008 bears had massive bear rallies, some running more than 50% on the DJIA and some spanning more than 25 weeks. Patience and reading markets well is key.
Check out below the DJIA in 2001/02; a 33% rally over 7 months. Enough to pull a lot of fresh meat into the grinder.
General market action and breadth
Overall, the market dynamics are largely unchanged from last week’s report.
All indices are significantly overbought, specifically the DJIA. The S&P 500 (graph below the SPY ETF) is ramming into its downtrend line and its 200DMA, resistance in the recent past. Even for short-term traders, this is not a good environment to start new positions. Unless they’re looking at the downside … however, the technical setups that I like probably won’t show up until a week or two from now.
I am seeing thin breadth; in fact, some metrics show bearish divergences to the summer rally. It’s a heavily split market where only the DJIA has made a higher High, which has not been confirmed by any other average.
And the DJIA itself is chock full of “value” stocks – healthcare, insurance, machinery, energy, staples and sluggish tech blue-chips. And it merely mirrors 30 stocks. Hardly a beacon of hope for me.
Let’s shift focus on the relative lack of rally participation.
What’s leading this rally?
I want a rally to be driven by rising liquidity in high-quality growth names, leading the market into uncharted territory. So far, there’s been barely any of that, at least nothing that hasn’t been out of the gate already. No constructive digestions resolving positively in notable names. Few accumulation of individual names showing up. Few opportunities that look valuable to me.
Those that did try to participate in the rally and attempted to move out did not get far to date. ASO tried to move out on low volume, now sitting under Damocles’ sword. SHLS gapped down on a share offering – more choppiness, and not behavior characteristic of a strong rally. I drew a line above where overhead supply should be a problem of the past, but it never got there.
There are a couple of lagging names that have rallied, and are trying to set up now: ASO, IBKR, ACLS, ON, ARRY, GFS. If this is such a strong rally, why have no good opportunities materialized earlier, and only 1.5 months later can we see a limited amount of setups forming?
Characteristically, you should see such behavior with more names right around the start of a new rally, not so late in it. This is why I’m looking at Friday’s move in ENPH with mixed feelings. It’s a great company, a great stock, and liquid. But why is it now, so late in the rally, trying to move out in an extremely overbought market from a wedging pivot point? And only on a 40% increase in volume from average?
I’ve said this before, as strong solar is at the moment, it is also extremely crowded with hopeful traders. I’m not saying it cannot work, but the odds suggest it will reverse or at least shake out within the next couple of weeks.
Some bright spots
Of course, there has been some good action, e.g. in HALO, CELH, ARRY recently. HALO has definitely caught my eye, moving into new High ground on rising volume. Fundamentals are good, strong growth in profitability and revenue corroborated by a strong chart. I have to admit I let the move above $49 go, but my position size would have been marginal so nothing lost here. It looks strong and will remain on my watchlist.
CELH and ARRY are acting strong again. An attempt by ARRY to move out of a digestion is probably imminent, but it has strong overhead supply and I will wait until it comes closer to all time Highs – I will let ARRY prove itself to me before becoming really interested.
ASO, although close to new Highs, seems to be drifting with the indices. A large digestion starting in Nov 2021 has resolved negatively, volume was anemic, now it is trying to set up a smaller digestion, also without significant positive volume. Earnings are reported on Wednesday. Considering all, I’ll watch it on Wed but most likely won’t act unless thunderous power comes in.
GFS is forming a choppy asymmetric digestion pattern, another yellow flag from a high-quality growth stock.
Sit back and watch
Again, I reiterate – starting long positions in such a thin and overbought market is unwise. I will stay away, unless the general market cools down a bit and these names digest more on dissipating volume and dropping volatility. Right now, I’m not interested in exposure, specifically in ARRY considering it still has some residual overhead supply from 2021 over $25.
Other interesting names are PI, FSLR and SMCI, all extended and excluding FSLR, not the Big Stock quality I’m looking for. Like HALO, I will keep an eye on them but they’re far from actionable for me.
Suppress any FOMO, and remember where we are. A deep bear market with questionable strength is certainly not the right time to plunge in. Every week, there will be a chart somewhere in the market that looks great. The trick is to know when the chances for success are good.
The DJIA might even melt up higher from here, but I don’t really care. There are no sustainable trends without reliable leadership, expanding breadth, and positive price action.
There is always a chance that I am wrong on all of this – in the end, it doesn’t matter either. If I’m right, I’ll protect my capital. If I’m wrong, then there will still be plenty of opportunities to capitalize on for me after such a prolonged bear. Unless new developments show up, I believe this rally will roll over in the next month and drag most stocks down with it.