Hello friends,
A shortened week has passed (Thu closed, Fri half-day only), and the markets have used that opportunity to steadily pump more FOMO into this ever-thinning bounce. The NASDAQ is now within 0.5% of its July Highs, and better, the even more-concentrated Nasdaq-100 has surpassed its July top and is within 4% of all-time Highs … of course all on waning volume after an initial thrust on the previous week’s inflation/Fed spectacle.
Like a broken record, this move is once again predicated on a very small and more and more dwindling number of tech mega-caps with exposure to the AI theme, largely MSFT, NVDA, META, AVGO. I really almost don’t need to see more than Microsoft (MSFT)’s reaction on the Sam Altman news, the late-comer crowd buying into Symbiotic (SYM)’s earnings report featuring AI warehouse robots after it had collapsed >50% in a few weeks, or renewed bounces in trash like ARKK (up 30%), PI (70%), AMSC (65%) or WEAV (36%) – we’re still deeply in the depths of the AI euphoria. To the moon. Rocket icon. Yes, I know.
Market internals
Problem is (and has been for a while) the increasingly thinning breadth of the market, and absolute absence of strong leading stocks.
Just from a descriptive perspective, look at the more “diversified” S&P500 when weighted by market cap (SPX; benefitting the roughly top-10 stocks exponentially) vs. weighted equally (RSP). You’ll see that the average stock hasn’t really gone anywhere this year, while the “magnificent-7” continue to walk out on the thinning ice on the frozen lake. As the late Bob Farrell stated, a handful of large-cap blue-chips rallying does not make a strong market … at all.
Though some of the indices are lose to their July tops in price, there are now a number of stark bearish divergences, the most prominent in the number of stocks trading near New Highs, featuring only about half the amount seen near the July top (and full of crap, discussed below). Advancing vs Declining issues now suggest a somewhat overbought market (duh!), all while the the “fear gauge” VIX trades at 12.5$. That’s the lowest since January 2020, and is about as misplaced here as a rhinoceros in a porcelain shop. Complacency is higher than it was in the top in 2021 that started the bear market – a rocky road lies ahead.
Leading groups remain uninspiring
While the experts at Bloomberg and consorts want to convince you that tech is the big play at the moment, think again. Saying that this market led by a handful of tech stocks is strong is like saying a nightclub with 7 people on the dancefloor is a booming party.
Check out the below pie-chart of what stocks had been leading the market end of last week; if you find that insurances, resource stocks, defensives and other laggard groups herald a strong market, you’re in for a spanking.
Coal, as I discussed at lengths over the previous reports, remains one of the strongest groups, a sign in itself – but there is also the small fact that insurances as a group (KIE) are continuously making new price highs, while other segments of the market are lagging. The former are flanked by staples and defensives from healthcare and the food sector (e.g. FMX, BRBR).
Uninspiring indeed.
Leaders faceplanting all over the place
Just read the last 5 weekly market profiles, and you’ll see that strong leadership – if there ever was some in 2023 – has been steadily declining. Lately, stocks like RMBS but also may others have been re-rallying to old highs in what can only be described as erratic and unhealthy price-volume action.
The biggest showstopper should be NVDA and its earnings reception – blowout on all fronts, but no reaction from the market. Quite the contrary – NVDA sold off somewhat on the news, forming yet another faulty digestion near new High prices. Given that this is the biggest FOMO stock across the market, the lack of intensity can be interpreted two ways – institutional money is indulging in very low-key distribution of shares to meet retail buying, or they are simply holding on to theirs, equally victim to the AI euphoria.
Whatever the case may be, NVDA is showing signs of weakening and is starting to diverge from its mother FOMO index. Further price action will lead the way ahead (read below).
Conclusion
The resolution of this over-impulsive rally gives more and more the impression of a short-covering rally of long/short funds, misinterpreted (so far at least) by many as strength in equities.
Judging by the lack of volume and asymmetric drift in all stocks that have any predictive value to the market, we can derive that we remain in a hostile and choppy environment that lacks catalyzing buying to drive equities as a broad group higher.
Sure, MSFT is up a little. Does that matter? It’s time is over since the dot.com bubble, and there is so much better stuff out there … if you can wait. We speculate in stocks that can make us truckloads of money, not the blue-chip returns sold to us by the average ex-car salesman fund manager. But the latter requires patience, and most people don’t have that.
I for one see no reasons to risk my hard-earned money in this strawman of a market. I’ll wait for the time I can make money hand over fist, which will most likely come once those self-proclaimed experts declare that the markets are clinically dead.
So long,
TGS