Dear friends,
The downtrend appears to be continuing for the moment. The intermediate-term trend has decidedly started making lower Lows on all indices. Negativity has for the first time in this bear market picked up somewhat more on a visceral level. I’ve talked to a ton of “non-stock-market” people who seem to be concerned with the recent SIVB debacle.
Credit spreads have exploded, gold and crypto have bounced, and fear has risen quickly, as people remember the last financial crisis involving a couple of banks collapsing. So far, this has been the biggest for a long time, and there is a potentiality of more “cockroaches” showing up soon. The VIX has responded in the last few days, although is not anywhere near yet where I want to see it (upwards of 40).
Fed funds futures and shorter-term maturity bond yields have immediately responded, where traders estimate that the Fed will now despite stubborn inflation and an even tighter labor market likely not raise rates as quickly … in the fear that something might break. Well, as bad as it sounds, by this point I think something has to break for the market to normalize again in the long-term. Complacency in this bear rally was ridiculous (e.g. read here or here), and equities are in need of a good flush-out of sentiment.
And the collapse in SIVB might just become the catalyzer that was needed. It is too early to know yet, so I’ll need to observe further over the next weeks and months.
Volatility and volume picks up
While the week started with reversals, churning and some selling following Tuesday’s testimony of Fed chairman Powell, the end of the week was dominated by harsh institutional distribution seen across all large-, mid- and small caps. This time, “value” stocks fared worth that the tech-heavy NASDAQ, due to the heavy exposure of SP500 and NYSE to financials, insurances, etc. Note the heavy volume spikes on Thursday and Friday.
S&P500, NASDAQ Composite, NYSE Composite, and many other indices have now crashed on high volume below short term price support, their 50DMA, and their 200DMA. It should be clear by now that this bear rally is over.
Financials are dumped
Even before the whole SIVB discussion, I wrote a note that XLF, an important banking sector ETF, was showing steeper selling relatively stronger. Now of course, it’s responsible for the brunt of the recent downside. While money centres such as WFC or BAC found some supportive buying on Friday, selling was generally broad over the sector, from national and regional banks to brokerages and investment firms and asset managers (e.g. see Apollo Global APO).
The recent rate hikes were of an unprecedented acceleration, and were bound to break something sooner or later. The question remains whether this will continue. As for stocks, I’m sure the developments and accumulated speculator emotions over the weekend will birth volatility come Monday’s Open.
Industrials remain the least weak
Selling has come across any industry, and the recently leading industrial and construction sector has not been spared either. CAT & DE continued to sell off, demonstrating once more that most stocks’ attempt at price discovery will be rejected by such a hostile market environment. BLDR’s attempt to move out from a larger digestion pattern was so far not successful, a typical observation in a bear market.
However overall, the group remains closer to new price Highs than most sectors. Despite selling, stocks such as ATKR, PH, URI, JBL, VC and many others remain the least sold equities, most likely resembling the latest “must-have” fashionable group that funds need to be in, rationalized away by earnings stability, government bills, overseas currency trends etc. The explanation does not really matter, but such stocks certainly do not resemble the leadership quality necessary for a new strong bull trend in equities.
Weak times crystallize the strongest stocks
Times such as now do help the stock speculator to spot the stocks that are sold the least, and thus for various reasons that I can’t go into here will have a high probability of leading in the next uptrend.
The highest-quality growth stocks in the market remain ACLS, ALGM, MBLY, SMCI, PI and GFS. While these are all displaying enviable price-volume action and lack of large selling by holders, progress is hindered by the market environment. I will be on the lookout for low-risk entry points concurrent to a possibly turning market, but as of yet, all the above are either trading in a choppy fashion, or are severely extended above their last digestion. LNTH, a biomed stock that had collapsed last autumn, is trying to regain ground albeit on a weak volume signature. This might still develop into something, I’ll keep an eye on it.
The bottom line is nothing actionable for me here, most importantly because a bad market will depress your chances of profitable long positions drastically.
Stay on the sidelines, careful but vigilant
Times like these are for watching, and noticing future potential in individual stocks, not for getting chopped up in volatility. A new market might finally arise in the next months, but the surefire sign of this happening is waves of new leading stocks appearing, and so far I’ve seen little evidence of this.
There is always an ALGM or an ACLS that will try to lure you in, but why risk any money now when the odds are against you? Why not wait until the tables turn, and you can make money hand over fist while everybody else is capitulating from fear, uncertainty and doubt?