Hello friends,
It looks like yields are done dipping for the moment – the 2-year treasuries are leading a rise in yield over the last few weeks, followed by the longer maturities and the US dollar. I can’t help but feel while the dollar had likely began pricing in a Fed pivot many months ago and equity traders eagerly followed suit, the bond market is not quite convinced that monetary policy will relax quite so soon.
While commodity futures (e.g. oil, cotton and lumber) priced in demand destruction a long time ago, technically we are just starting to see the effects of the Fed tightening on the economy, with corporate earnings in the tech and other growth areas starting to disappoint across the board. Economic sentiment is still kept afloat by growing retail spending fueled by a bubble of extreme consumer credit debt despite high interest rates. This is paired with a seemingly strong rally in stock averages, likely largely driven by short-covering and bottom-fishing.
Last week’s CPI release, despite a negative surprise, did not lead to a sell-off in equities. We could muse about the reasons for that, however the fact remains that there are very few actionable ideas for a stock speculator focusing on the leading growth stocks of the day. Thus, this rally is still on feeble legs, awaiting either an adrenaline shot or a death blow in the next couple of weeks.
It’s very likely though that the Fed won’t like rallying markets, resilient consumer spending and a labor market tight as a corset despite inflation dropping less than anticipated.
Averages continue to digest relatively constructively
The short-term slightly overbought state in the market has been worked off, and indices have been undulating quite constructively in a tight price range. The NYSE and SP500 temporarily undercut the Lows of this range on Friday, but found support immediately to close back in the range.
However, the intermediate-term trend remains somewhat extended – the rally starting in October has not had time to properly digest its to-date 16% gain (SP500). A few more weeks of continued constructive side-ways action would markedly improve the dynamics of the choppy trading we’ve been experiencing in this rally.
Tuesday, the day the CPI was released was a complete chop-fest. The market gapped down, immediately rallied up, then sold off again within an hour, only to rally again into the end of day. This shows the ongoing fight of the bulls vs. bears, which so far has not found a clear winner yet.
Earnings reports – the opium of the masses
As much as this market as a whole has largely been meandering on lacklustre conviction and volume, there is one thing that keeps bringing liquidity to specific stocks at specific times.
As in any earnings season, the reporting of financial results brings volatility to the markets. This rally, which started in October ’22, is now witnessing its second earnings season … and quite honestly, the volume that comes into the market on those days remains almost exclusively what moves stocks with any conviction at all.
This has been highly supportive of a large array of laggard stocks of the capital goods, machine, construction and other industrial sectors which have been part of the questionable leadership in this rally, gapping up on numbers releases (e.g. WCC, URI, ATKR, GWW).
The question is, whose buying will support the markets once this earnings season ages, and all the “WE’RE NOT IN A RECESSION, SEE?” emperor’s new cloths-news are out?
Market still led by laggards, but some cracks are forming
Recession plays and late commodity stocks continue to lead the market – capital goods (industrials, electrics, machinery), insurances, oil & gas/energy, car parts (e.g. ORLY, AZO, GPC), used car dealerships (e.g. AN). Surprisingly, there are many car dealerships that are near new Highs in price, (e.g. PAG, ABG, GPI) which all show decelerating but still on-the-upside surprising earnings and sometimes revenue for the last quarter(s). The consumer remains resilient, indeed … or maybe higher interest rates improve the bottom line on car financing and inflation helps push margins.
Some of the oil & gas large- & mega-caps are taking renewed hits – Chevron (CVX), Devon (DVN) or Conoco (COP) have all sold below near-term support levels on rising volume, starting to make lower Lows.
The recent advance of precious metals was fended off for the time being, and gold & silver futures continue making lower prices in the intermediate-term failed rally while long-term downtrends remain broken. Precious metal miners had been a few of the more interesting leaders of this October-bottom rally.
As for consumer discretionary and retail, action has equally not been fully malevolent. CROX had a gap-up on earnings that was sold into during the day, typically a sign of institutional players taking profits in a liquidity moment.
The homebuilders, another group that had strongly been leading in this October rally, has on Friday proceeded to make short-term lower Lows as well. This does not have to be the end of the move, as digestion patterns could form and can morph and and forth – but then, every sell-off starts with making short-term lower prices.
Take a peek at LEN or PHM, some of the more eminent names in the industry. Despite a strong recent rally, price is now kicking down a bit while the indices are holding better. Home-builders are usually early leaders, one of the first to discount bettering economic situations. The price-volume action is not catastrophic yet by any measure, so digestions might still form over the next months.
Leading stocks remain few in numbers
Many of the stocks that were showing promising action recently have not followed through on their early promises … and few promises they were, indeed.
MEDP, which had formed a setup after a strong earnings gap-up back in October, has soured again. It sold off after an upside earnings surprise and a couple of failed attempts to continue its trend.
CPRO, an admittedly very thinly-trading telecommunications stock with triple-digit earnings and sales growth that had been leading on the upside imploded on negative supplier news. Another one bites the dust. This one can serve as yet another example on how lack of institutional support can lead to massive volatility when seemingly bad news come in. One should not indulge in illiquid stocks in choppy markets – it only has to go wrong once, and the profits of a while are gone.
WING, the fast food retailer, attempted to move up after a very deep correction that will attract a lot of profit-taking at new Highs from the bottom-fishers. Earnings are coming up fast in two days – this stock has such a choppy character that this could go both ways, but I do not believe that the current environment warrants taking risk in a name like this when there is better merchandise out there (see below).
More questionable action came from ASO, ANET and SMCI. All are chopping around new Highs with very limited or even adverse volume patterns. Buyer beware, this is not what you should be seeing were we in a good market.
Semiconductors remain the only viable leading growth group
Semis have been all over the place lately. A large number of stocks have rallied strongly or gapped on earnings reports – ADI, ON, CDNS, LSCC, GFS. Among those mentioned, GFS is the only stock that could qualify as a ‘new’ leadership candidate, as all the other ones are the old dogs barking again. New bull markets need to be led by new stocks. However, GFS again is forming a wedging-type advance into new High prices without properly digesting … precarious and not actionable for me.
The absolute stand-out leaders in this market are still the small subset of fresh semiconductor stocks that moved out lately (many out of questionable patterns) and continue to hold their gains. ACLS, AEHR, ALGM, PI and MBLY, the latter the most liquid name, are the definitive high-quality stocks of this market.
All of them are extended in price right now and need a constructive digestion to offer a low-risk entry. I fear however that these have become massively over-owned and chased by every growth trader that still traverses this complacent market, and a heavy shakeout of the likes of SWAV or ENPH could nullify their strength.
Specifically PI appears unable to continue its move, chopping around the 130$ for months now. I did not like the way it reversed mid-day after a phenomenal earnings report on February 9. AHER looks like it might be setting up some sort of a box pattern here, potentially actionable in a few weeks of volatility subsiding.
Be that all as it may, a few (and some of them rather thinly traded) stocks from a single industry, while the rest of the market is led by late-stage defensive sectors, is not enough to declare a new raging bull market. Profits can be had in these leading names, but the odds are shifted against me here. My position sizing will still be small, if any exposure is warranted at all, and only increase upon gaining traction and success in these names over time.
Conclusion
I do not see anything actionable right this moment, but I will bend with the wind. Should the market roll over again for lower price and one of the over-extended tech mega-caps such as AAPL or TSLA leads this decline on volume, I shall not be inclined against another short trade there. If the market continues to rally strongly (and I emphasize, strongly), I will give these leading names a chance should they form a low-risk entry point that suits my criteria.
Cheers – onwards and upwards!