Hello friends,
The first week of the year has passed with a slight 4-5% pullback on the indices – something very common. However, the angle of the selloff has been steep, and the previous rally had become so extended that a prolonged pullback should be in the cards, whether that’s more downside and support or sideways digestion. That is, if the market keeps rallying – because, as for the last months, nothing of substance has improved since the new year rolled around.
Large-caps, driven by the Magnificent 7 stocks (that by now have a mythical reputation similar to the Nifty Fifty in the 1970s) have shadowed the more radical selling observed in mid-, small- and microcaps. For example, see the comparison of the cap-weighted large-cap SP500 and the mid- & small-cap Russell-2000:
Distribution (selling or stalling advance on rising volume) has again breached the threshold of a big flashing ‘WARNING’ sign, which is never a great omen and commonly precedes at least a secondary reaction in the general market, the beginning of which we might be witnessing.
Value and cyclicals remain leading industries
Next to the now-stalling advances of the overhyped tech mega-caps of $AAPL, $MSFT, $NVDA, $META, $AMZN etc., the market is still mainly led by uninspiring industries often reflective of a weak and late-stage market – industrials and capital goods (largely electronics, construction equipment and materials, machinery; too many to mention here), shipping due to geopolitical developments (e.g. TDW, LPG, even a lot of volume flowing into the collapsed ZIM), and defensives including insurance and large biopharma (e.g. NVS, AMGN, VRTX, MRK, REGN). Another strongly leading group are coal stocks.
So far these moves look sturdy and some of them might be come tradeable if the right risk/reward opportunity sets up – however, the general market remains precarious and weak, which often leads to whipsaws in individual stocks stopping traders out.
Quality growth leaders remain battered and stall
The miniscule amount of growth stocks that are left behaving well (and even then some only relatively) has equally not been able to gain substantial ground. Heavily choppy trading is the mode du jour, and any attempt of making a little money in most of them, even successfully, is usually overshadowed by stopout after stopout due to the heavy chop across the market.
Check out ARM, DUOL or IOT – a few of the stronger names. All of them have tried to move out into new High price ground and free price exploration, just to stall and fall back on lack of committed follow-through buying demand. These are not the signs of a great new bull market in equities. Of course, they are somewhat holding and continue to show strength. In a true new bull market they would most likely be the high-quality leaders of the day. But their reluctant rallying paired with their very small number suggests that this is not an ‘easy-money’ environment.
This is the gist – the market has been opaque and choppy for years now (at least when looking at individual stocks and not when looking at the slowly-grinding indices moved by their mega-cap bias). Very few low-risk high-reward opportunities loom, and as before, we need to keep watching for improvements. They might come sooner than later, or later than sooner – it does not matter. There is no point in playing when the odds are stacked against us. For the time being, I remain more strongly allocated to income strategies than capital gains.
So long,
TGS