Hello friends,
I haven’t given the market an MVS above 3 for quite some time. I was surprised myself, however it is crucial to keep in mind that an aggregate measure of 3.9/10 is still pretty crappy. Let’s expand on how that still low number came about in such a hyped market environment.
Everybody is talking about it, and it’s true – the S&P500 (SPX), the most widely-followed stock average in the world, has made an all-time new High in price, after a strange rally starting about at the time of last year’s US bank collapses and Fed/Treasury (read taxpayer) bailouts. I had on multiple occasions in my market profiles discussed that this was a very likely outcome of the 2023 rally, despite the thinning quality of it.
As exciting as this may sound to the passing observer, the devil lies in the detail here. Let’s look at some flies in the ointment – and though I’m aware that there is always a reason to doubt a rally, these ones are a bit more than just opinions:
This move into new Highs so far has only been mirrored by two other metrics – the QQQ, which is in its mega-cap bias in effect as similar to the SPX as the Olsen twins to each other, and the Dow Jones Industrials, a severely outdated narrow index of 30 large-cap stocks.
When looking for confirmation of this dynamic by other segments of the market however, the sound of the crickets becomes very prominent suddenly. Compare for example the SPX vs. the general trend of mid- small- and microcaps (RUT, SPSM or IWC), those segments of the market that usually lay the foundation of a broad market advance and contain the best opportunities for speculators on the upside:
While a general rally of very strong power had occurred in November & December, these segments have now pulled back in an equally volatile fashion, while only the mega-cap weighted indices have carried on to the upside. To boot, none of these other market segments is anywhere close to their old 2020/2021 or all-time Highs.
The reason behind the move is irrelevant – whether you think it has to do with monetary policy, corporate profits, analyst upgrades in ever-FOMO stocks such as AAPL, speculation on AI, inflation or any other reason.
In effect, we’re so far watching the continuation of a move that is predicated on a couple of extremely large-cap well-known brand stocks (mainly AAPL, NVDA, MSFT, META, AMD, etc.) that all ride on the same theme of AI and American blue-chip tech, while the rest of the market is lagging and producing few to no tradeable opportunities.
I’ve hammered on the dangers of markets only driven by blue-chips over the last few months, and will not repeat it here – suffice it to say that we have to measure a market advance not by the awe-inspiring angle of the indices, but rather the inherent risk of participating in their move. A narrow segment of the market has decoupled from the rest and keeps rallying with thinning breadth (st, just as in many previous tops in history (e.g. 1974 and 2000). The risk of flopping over in a volatility expansion, that might or might not occur very soon, but when it does will bring a world of pain to those buying eagerly into the aging move.
On above’s example of the choppy, erratic and late-stage SMCI exploding 35% in a single day on continued AI news and earnings guidance reminiscent of the late SYM which ran 51% in a day, and along a couple of other names discussed below, you can see that the market is overheating, at least in some instances. Friday’s gap and rally had a single theme that has equally been crystallizing over the last months – computer and semiconductor capital goods (peripherals, server hardware, manufacturing equipment, etc.). Stocks like PSTG, SMCI, DELL, AVGO, PLAB, ANET, VRT, ONTO, CAMT, MTSI, AAOI, AEHR and others have been chopping up & down violently over time, forming somewhat intelligible up-trends which however are hard to capitalize on on when employing proper risk management techniques. This same thing happened right at the end of the dot.com rally. In fact, many of the names now that are highly extended after crashing 2021/22 look very similar to many stocks of the dot.com era, for example CAMT.
These stocks will be responsible for a lot of FOMO chasing, while the blue-chips NVDA, MSFT and AAPL have become the most crowded trades for both small and large buyers.
All this may be very well if you’ve bought the dip in market ETFs or the old blue-chip when the market was down in 2022 (a tactic that can cost you your last shirt if you do it at the wrong time) and are complacent with the return these sluggish names can bring you. But the overall chop and whipsawing nature of the price action in as good as all stocks in this market makes risk-controlled speculation in the true massive movers next to impossible.
Crucially, so far no real unknown and high-quality liquid leading stocks have popped up on my radar, and the very very few there are as well show choppy price action and a general absence of low-risk entry points.
We’re about to enter earnings season, traditionally associated with high volatility. Let’s see what happens next, which could be anything from a market crash to tons of great opportunities suddenly appearing and making us all great returns. We will only be able to tell what happens, when it happens. Whatever you do, don’t take your eyes off the market.
So long,
TGS