Hello friends,
The indices were stuck in a range from early March up until a week ago, when they started selling more commitedly. Over the last 2 months, the NASDAQ Composite (COMP) and the SP500 have logged a consistent increase in selling days on rising volume, an accumulation of which is a typical sign of an impending pullback which we’re now witnessing. Ironically (or not when viewed from a contrarian vantage point) this coincides precisely with the COMP touching all-time Highs again near $16,215.
The popular indices now find themselves trading below their stalling 50-day moving averages. Whether they will catch support soon and this all turns out to be nothing more than a secondary reaction in the long-term uptrend, or whether this will yet become something more sinister, remains to be awaited.
In any case, as I’ve been decrying many times for over a year now, the 2023 and early 2024 rally was always of low quality, bringing out few actionable high-velocity leaders, many duds, and heavy concentration of retail- and fund money in the obvious and crowded mega-cap AI tech names. The broader market (for exaple small- & midcaps, e.g. the Russell-2000 RUT), though recently again trying to confirm the uptrend of the popular indices, has sputtered time and time again when moving up, only to now roll over again and back into its year-long choppy trading range.
Earnings season is coming up, and many of the names that are cap-weighted to a ludicrous degree in the popular indices will report this week. Since we’ve had some fairly consistent selling in the last few days, at least a short-term bounce could be in the cards soon, depending on the character of the pullback which we yet have to receive more data on – and earnings reactions in the big names could drive such a bounce.
Suffice it to say that wind is picking up from the recent doldrums, but which way it is blowing is not quite clear yet. Bad action in leading stocks however offers a clear insight – it is time to reduce risk and exposure, if you ever had any significant degree of such in the first place.
Leading stocks cracking all over
Leading stocks have been acting choppy, erratically, and definitely not the way that they should have been if we were truly in the great bull trend that NVDA & Co. had everyone believe. Selling has particularly manifested in the last handful of weeks, reminiscent of the Jul-Nov 2023 reaction.
First of all, though not a great name anymore by a long short, NVDA has rolled over from a semblance of a formed digestion, now making lower Lows in the intermediate-term trend. This is followed by very heavy and steep-angle distribution in ARM (another AI & semi hype stock), failure of DUOL and IOT, collapse of NXT, and significant declines in ELF & CELH. SMCI, after its climax top on Feb 16, is now victim of heavy dumping by its large holders – the mark-up is long over, and significant downside is ahead. In fact, the lower Lows on Friday could have been a worthwhile short entry point into SMCI, though the impending earnings reaction might blow you out in such a hyped name.
This is really all that matters – as Livermore said, if you can’t make money in the fast and actively-traded leaders of the market, you won’t make money elsewhere. Once again, it’s time to sit on our hands (at least in the US equity space) and watch how things unravel.
So long,
TGS