Hi friends –
Overall, the US markets are stuck in a liquidity-driven rally fueled by AI hopes in a handful of mega-caps, all while the rest of the market behaves fairly choppy, and any opportunities to profit are offered only at very high cost.
Various pundits and financial media have commented on the SP&500 crossing the rainbow bridge across the magical 20% threshold off the October Lows (note the low volume of the advance and generally post the March/April bank insolvencies):
This fundamental misunderstanding and reductionism of stocks is nothing new … and again we need to ask, what does 20% really mean? The reality is, using these goldilocks statistical figures for reading the market is as useful as applying proverbs such as “The third time is the charm” to doing cosmetic surgery.
Curb your enthusiasm
Even senior figures have commented on the rising breadth of the market last week. And it is true, small and mid-caps did outperform as a group, seemingly in a small rotation out of the large-caps in the market, specifically on Tue-Wed:
But no one knows what will happen with the market over the next few weeks/months. Factually, this rally is as thin as it has been over the last few months, and the Russell 2000 (RUT) and other mid- and small-cap benchmarks rallying for 2-3 days does not change this yet. Whatever the direction will be for the next few weeks, it will likely happen begrudgingly and drawn out, unless there is a major breach of expectations by the FOMC this Wednesday.
In any case, a market can either be benign (tradable) or malignant (not) for different people at the same time – it all depends on their chosen strategy of extracting money from the market. And for speculation in the best stocks of the market, there sure is not a lot to see or do right now.
Movements still uninspiring
Neither progress to the up-, nor to the down-side was specifically pronounced in individual stocks, a classical characteristic of a choppy market.
AAPL, the largest weight in both SP500 and NASDAQ Composite, was briefly driven by the exuberant amateur crowd into all-time new price highs, arising out of an asymmetric digestion only to reverse on rising volume. This appeared to be a ‘sell-the-news’-type event regarding the launch of their AR headsets. Old news is no news, and steam appears to be running out in AAPL. It’s one of the last bastions of the dumb money and right now akin to a safe haven, but don’t make the mistake of thinking that exuberance cannot bring this stock even higher.
Complacency remains extremely high and has actually gotten worse – the VIX (the “fear gauge”, SP500 options premiums) is now around 13, and 4.5% lower than the most extreme values in the exuberant and thin 2021 market. It is hard to put into words how out of whack this is with what we’re seeing in stocks across the board. People are buying call options en masse, while the cost of hedging the downside has not been this cheap for a while.
Well, what’s leading?
The number one trade of the week was the purchase of low-priced crap, pushing the obvious tech darling stocks higher, or buying the dip in collapsed past leaders. All more signs of amateurs buying into a market that they expect to become a reincarnation of the 2020 bull trend – check out this, or look no further than the ever-lasting ‘In Tesla We Trust’ trade into which people are piling yet again. So far no signs of a shift in tides to betterment on the horizon.
Further, the market is again (or still??) led by the finest of laggard industries and stocks – industrials & established electronics manufacturers, construction equipment, and renewed speculation in homebuilders. However, there are as good as no real high-quality stocks appearing on my screens, suggesting this to be largely another wave of money rotation from one segment of the market to another.
In the meantime, Gold has pulled back but is so far trying to feel for an intermediate-term trend bottom around the $1,9450-1,950/oz level – no confirmation by strong miners yet, but neither is this classical hedge of a group selling off. We will see how things develop, but nothing is actionable right now, as a sister stock confirmation is missing for the rare existing setup.
Meanwhile on the front lines
As for the rest of the market, the trenches have been silent for the stronger stocks of this market. Nothing too benign, nor too malignant happening in the leading stocks. LNTH and SWAV are stuck in the mud, neither being able to rally from their digestions, nor giving too much ground back. SMCI and RMBS remain extended (the former most likely in a climax run), while CELH is begrudgingly drifting up with the market, but no sign of big profits to be had after the earnings gap. Overall, the relative quantity of strong stocks has by no measure improved, and the general conclusion is that of a Siren-like environment that is drawing in a lot of speculators into obvious and crowded stocks, most likely resulting in a long squeeze at some point in the near future.
ACLS is pretty much the only stock I could put forward as something with potential once the market will reliably turn, but neither is the volume profile inviting nor are their any useful low-risk entry points forming.
The bottom line is that such a small amount of leading stocks is just not enough to put in a reliable bottom.
As over the last few weeks, I invite you turn your head towards Japanese equities. I have a couple of positions on, and there is a vast breadth in this market that is unmatched by any other marketplace right now.