Hello friends,
The title says it all – last week, indices showed some reversal signs (specifically the NASDAQ Composite), but broadly stocks continued to drift up. But what type of stocks?
[n.b. – remember that volume was a bit distorted by last week’s MSCI semi-annual reviews]
Case in point – the Russell 2000 (RUT chart above). Representative of mid- and small-caps, its chart and trading character has been more erratic and choppy than shapes on Hunter Biden’s “art” pieces. Violent gaps and rallies up, interspersed by choppy pullbacks, have been the bread and butter of this index. Normally it’s a great sign when the smaller segments of the market confirm a rally, however of course it’s a bit more complicated than that.
Problem is, when I wrote ‘stocks’ in the first paragraph, I meant legacy issues – industrials & construction, regional banks, resource, wholesalers, etc. – laggards in short. While the popular indices acted in a more muted fashion last week, previously hard-sold value stocks and collapsed past leaders rallied hard. I’ve discussed in last week’s Market Insights some of the reasons behind this impressive bounce, and we should heed the fact that both thin melt-ups and false bear market rallies can be characterized by the same observations, one of them being violent moves up that draw in a lot of amateurs.
Laggards doesn’t mean you can’t make money in them – while everybody is discussing gold and oil (at all-time Highs), coal stocks are making a great run. You can really buy anything you want, and granted, the upside bias of the stock market is the central pillar of the long-term holder. Though, for the swift speculator looking to lock in hundreds of percent gains in a few months, the question arises – why should I buy into these laggards the market is offering me? Any purchase (or short sale) opens up risk, and if I risk my hard-earned money at all, it will certainly not be to buy a couple of old-world stocks that can make me 30-40% a year on a 10-20% position … there’s just not point in that.
You can read anything into any news into the stock market – psychology will bias the herd always to see what they want to see, the mirage in the desert. Fed chairman Powell’s fireside chat last week really contained everything and nothing – from ‘we might hike rates more in the future’ to ‘we’re about to cut rates’. And the market has reacted to that in the only fashion it cat – according to the sentiment of the herd. A broad rally on Friday came onto us on the heels of that ‘news’, but was it really news? And has anything substantially changed in the market?
Rallies in crappy issues underline the greed FOMO in retailers (and fund managers)
As before, when the indices rally, we need to become a bit more granular in our analysis and look at what’s really driving the move.
While blue-chip tech has been the main engine behind the thin 2023 up-trend, those stocks started some signs of lagging the general sentiment last week – NVDA, MSFT, AAPL etc are actually slightly down from a few days ago, DELL has been whipsawing heavily on earnings. Nothing crucial in an of itself, but still worth mentioning – as it signals that this rally has once again rotated.
The above-mentioned groups were the main culprits behind Friday’s move, but they had been showing inflows for a while – battered value and cyclicals are attracting a lot of capital, concurrently the NYSE A/D line – more representative of such stocks – has been diverging massively from the Nasdaq A/D line, emphasizing the risk-off nature of this market.
While up until a few days ago, stocks like MSFT had been heading up on almost a daily basis, recently (once again…) the dumb money has been piling again into battered past leaders and hype stocks under distribution – ROKU, SHOP, AFRM, UPST and more were up 8-25% in a few days, or the AI FOMO stock SYM exploded 60% in merely 4 days. But as the golden boys said, there is no bubble.
If you look at a couple of charts from the dot.com top in 2000, you can find a lot of charts that look like today’s. Check out FCEL or JNPR – new highs from erratic digestions which look just like today’s NVDA or SYM … just before the final collapse.
Again – I’m not saying that has to happen to some or all of these stocks – but it’s about probabilities, and those have been turning more and more in favor of such a scenario in the course of the last year, or rather decade.
Keep your eyes peeled, but don’t jump the gun
Granted, there are a couple of stocks showing some hope – DUOL, IOT or VRT are relatively strong. Relatively. But they have also been trading erratically, not offering low-risk entry points, and 3 stocks along just cannot turn my opinion of this market.
Great traders don’t suffer from style drift, and don’t abandon their strategy just because the market tries to lure them. Sure, develop a new strategy that is orthogonal to yours in application and market interpretation, perhaps extracting money from other inefficiencies of the market – there is no reason you shouldn’t make any money, and staying flexible is another characteristic of great traders. But don’t start changing your rules and the basis of your developed high-odds plan because of ‘wanting’. Don’t make something out of nothing. Don’t see something where there is nothing. Stay tuned and watch the market for the tides to turn, but wait for your own signals and only then hammer in. There’s no need to be first, there’s only a need to be best. Running with the herd does not pay (at least not truly), but it might as well push you over a cliff.
So long,
TGS