Hello friends,
The market remains a chop fest in which proper risk management for individual stocks remains close to impossible.
Price action over the last two weeks (and effectively for much longer) has virtually gone nowhere, and every day seems to bear the same back&forth. If this was a tug of war game, it’d be between 2 heavily obese boys sitting in the sand, legs spread in a V, pulling the rope in a lacklustre fashion with one hand while playing Call of Duty on their portable console in the other.
Whatever happens in the stock market is dependent on the basic conditions that determine the environment. Orders are placed based on people’s expectations of what will happen. If nothing definitively changes in the basic conditions, expectations don’t change, and nothing will definitively change in the market. So far, there is nothing in the basic conditions that I would describe as novel or definitive changes, thus what has happened will likely continue to happen for a while.
This could change at the drop of a hat … but nobody sporting any head-warming apparel is in sight. Welcome to bear- and choppy sideways markets – they will either scare you out, or wear you out.
A quiet & thin week
Owing to still certain market places and speculator segments hanging into the Easter holidays, especially the beginning of last week was thinly traded and full of anemic action.
Overall, the market indices are extended in the short-term (see below NASDAQ & NYSE charts) and there is a high likelihood of at least a small 1-2 week pullback digestion. Note the severely dropping exchange volume on the NYSE over the rally, after the waterfall selling in March after the banking insolvency episode. The NASDAQ Composite has produced two sessions of rising volume on dropping prices (one on SP500), which is a sign of institutional unloading on average.
At the moment, when there’s volume at all, it tends to be selling. When the market is up on rising volume, as on Thursday on NASDAQ, the stocks that lead do not inspire confidence: the good old AAPL, food stocks (e.g. INGR, a starch/sweetener manufacturer), gold (futures, miners including AU), a lot of old stocks with massive overhead selling pressure, and some bloe-off crap like Guardforce AI (GFAI). Clearly not an environment that is breeding high quality leading stocks.
Market breadth and leadership does not improve
Across the board, capital is not inclined to start accumulating great quality merchandise as of yet. Although the Advance/Decline line (cumulative measure of stocks on an exchange moving up/down) of the NYSE is just about probing to start trending higher significantly, this is not confirmed by the NASDAQ exchange, which has only thinned more over time.
This discrepancy, as we will see further below, is indicative of value stocks outperforming and financials relief-bouncing after SIVB/SB/CS, while no real commitment of money is flowing towards earnings prowess.
As I warned on numerous occasions, there are still 2.5x as many stock making new Lows in price than there are stocks making new price Highs, despite many pundits’ claims that “the new bull market is here”. Many stocks making new price Highs are the lifeblood of a strong market, and these are still all but in hibernation mode here.
Market participants in flight-to-safety mode
Earnings seasons kicked off with consensus beats and positive speculator reactions in sucker-punched financials (JPM, C, WFC). But let’s be honest, a place like Citigroup just can’t hit 75% revenue growth year-over-year organically anymore. Of course, the reported numbers are to a large degree positive due to people moving their cash from regional banks to large money centres in fear of further insolvencies in regional banks whose balance sheets might still turn out to be toxic dumps. Compared to entrepreneurial growth companies with high debt/shareholder equity, the Financials sector will still post better numbers on average this quarter, but such explosions are certainly not organic.
What is leading the market is again unchanged from last week. Money is rotating back into commodities – prominently gold (as good as all the miners), copper (e.g. SCCO), steel (e.g. RS), some oil stocks -, the odd industrial & machinery, discount retailers & fast food outlets (FIVE, MCD, YUM), healthcare and biopharma staples (e.g. LLY, VRTX), food staples (GIS, LW, HSY), pure recession plays (e.g. ORLY, AZO, CPRT) and many generic high earnings-stability stocks (e.g. DOX, FCN).
I’ve said it many times before – when frozen food stocks and the likes start leading the market, beware. Especially the outperforming run-to-safety healthcare and biopharma sector is large part of what leads to the current strength in European shares (e.g. see Roche, Novartis, AstraZeneca AZN or Novo Nordisk NVO), but the quantity of genuinely interesting leading stocks as potential harbingers of bettering basic conditions is minimal to zero, depending on how stringent your criteria are.
Homebuilders are also trying to gain footing again, but on questionable volume – LEN, PHM, DHI, MTH, TPH, GRBK all are trying to move up, but can so far not attract follow-through buying volume.
The same patterns can be spotted everywhere – low volume drifting in the bow wave of the FAANG-propelled popular indices, or choppy fights or buyers and sellers.
Leading stocks remain largely unattractive, or extended and choppy
The same dynamic is reflected in what few interesting propositions are leading the market in the area of growth stocks. As good as everything remotely interesting remains a hopeless ‘death by a thousand cuts’.
You can gauge the strength of a market by the quality of the price and volume action in its best stocks, as well as in the number of them. Although a few have come out of the woodwork lately, true conviction is still lacking regarding institutional accumulation in these stocks.
While recent leader AEHR is running into trouble, SMCI, PI, ACLS, ALGM, ANET, GFS, FSLR and MBLY show the best charts, but it remains to be seen whether they can hold well until it improves.
The negatives are here that almost all of them are from the same industry (semiconductors), with the exception of only SMCI, ANET (computer peripherals) and FSLR (solar, no group confirmation at all). This again reflects the thinness of the market, as strong trends are always driven by broader leadership.
Even bad markets will constantly tempt you with setups. For example, FSLR and MBLY are currently forming digestion patterns. The problem is that the odds of stocks moving and staying above significant price levels into new price Highs, as a lot of large traders will use these price levels to unload their shares and book profits. In such a short-term trading environment, if one has to participate at all, it should be with small size, strict risk management and high selectivity to the best opportunities only. I myself find waiting for volume explosions to be one of the worthwhile cutoff criteria in deciding what’s worthwhile trying to venture into.
Another example – LNTH, a leading biomedical stock that had collapsed late last year, is trying to re-establish its footing and trading at new highs again. Accumulative signatures on the right side of the pattern are partially present but not convincing. Even if a low-risk entry point forms, I would need to see extreme buying demand come in to convince me to start probing this stock in this environment.
Certainly no one should force anything in this market. New Highs in price tend to get rejected, and even short-term trading opportunities suffer from heavy volatility and shakeouts. Choose your battles well, and this one is definitely not what I would characterize an easy-profit environment.