Hello friends,
Over the last few weeks, the markets have rallied, most likely on a large wave of short position unraveling and FOMO buying into damaged past stock leaders after speculators eagerly read their dearest wishes between the lines of what the Fed has pronounced to the world.
We’re in an environment where we face the highest unemployment rate since 54 years after the Fed has done some of the most extreme rate hike accelerations in history, pushing the yield curve inversion to a 40 year Low. Unemployment however is one of the main readings that the Fed uses to justify its ongoing ‘data-driven’ actions (the actual utility of these BLS reports remains to be seen) – seeing it drop from an ‘official statistical’ standpoint, how do you think they’ll be acting?
As always, it makes for a good introduction but is almost useless to look at the state of the economy to justify actions in the stock market. I don’t speculate in unemployment numbers, but in stocks – so I will let stocks tell me what to do.
The general market is yet pulling back constructively
The extended NASDAQ and SP500 have been declining slightly last week on low volume – a highly constructive sign at such a stage in the rally. The short-term excess has successfully been worked off, and indices seemed to find some support on Friday.
To shake off the excess of the intermediate-term bounce that has been going on since late December, ideally we would see 2 to 3 weeks of tight sideways action on low volume. Such would certainly improve my overall view of the market, but the main fly in the ointment remains the almost complete dearth of actionable high-value opportunities that emerge around true market bottoms.
And we are already technically in this rally since mid-October, mind you. If leadership is to come in, it better come quick. This rally can still head the NASDAQ to $13,000 or higher, but a market that is not driven by valuable stocks just cannot go anywhere sustainably.
At the bare minimum, NASDAQ (and in a similar dynamic the SP500, NYSE and DJIA) needs to breach above $11,270 on volume after a digestion to signal a technical change in trend, while stock leadership emerges. I have my doubts though that we will see the latter.
People remain extremely over-complacent
My stock screen has a few days ago brought up the symbol SVIX. For those that don’t know it, this is literally an ETF that is short the VIX, the ‘fear gauge’ or ‘complacency index’. Last week, the bull/bear ratio of speculators turned to 1.9. FOMO buying into extreme overhead supply and no-earnings tech stocks is rampant … there is clearly an absence of a large washout of the everyday Joe that bottoms typically bring along. Another minus for this rally to be sustainable.
No large changes across industry trends
Last week was almost flat for almost all stocks across the market. The market is waiting for something – those who bought have done so, those who wanted to cover their shorts too. No that the big news in the earnings season are out, any larger upside moves have to be driven by fundamental strength and commitment of the big money players – so far absent.
Precious metals gold and silver continue to show weakness, both pummeled by a bouncing dollar and continuing hawkish drumbeat on continued tight monetary policy. Gold is now testing slightly lower Lows in the intermediate term trend, while silver which was leading the bounce is now leading continuously lower prices. This is not over yet, IF strong demand comes in. But mining stocks are reflecting this dynamic, and many setups are souring quickly. I will observe further.
Meanwhile, the transports that have been leading the upwards-thrust in the Dow Jones Transport index are experiencing some selling, with the strong ODFL already undercutting the Lows of its recent earnings gap, and others such as KNX or PCAR not being able to hold gains.
It seems, laggards at large (with a few exceptions) can’t get a strong foothold in this market either.
Leadership remains thin and unchanged
As mentioned in previous reports, there are but a small handful of worthwhile stocks mentioning in the leadership category of growth stocks. One could have made a little money on ALGM’s move, but being in a position to do so would have made you test every single attempted advance in recent setups, racking up many unnecessary losses, and trading in small size. The profits of being with small positions in 1-2x stocks in a bad market is just not worth it, and won’t make the big bucks anyway.
ACLS, AEHR, ALGM, MBLY, RMBS and PI remain the growth leaders of this market – all from the same industry, many even of the same niche, and half of them of questionable liquidity. As good as they look, they are not enough by themselves to drive an uptrend. I will monitor them as potential leaders to act on once the market turns reliably … even so far, they have not given pristine low-risk entry points. AEHR is now following the lower-quality AMKR in long-needed pullback, as almost all these small semi-conductor stocks are hopelessly extended to the upside.
Other worthwhile mentions: HALO, a recent biotech leader, has fully retraced any gains made from its questionable move started in November. SMCI, a recently rising star, is displaying a whole array of bad price-volume action (reversals, bad gaps and low-volume advances). it is being pushed up close to new Highs by anemic demand and a drifting general market – I believe, SMCI will once more try to suck in traders with a negative resolution of the digestion and roll over in the next few weeks/months.
More mediocre action can be seen in ASO (low volume wedging), AXON (wedging and heavy shakeout) and CPRI (disastrous earnings gap from a wedgin rally) do not inspire confidence.
Conclusion – sit on your hands …
… when there is nothing to do. And right now, there really is not many actionable ideas out there. I had passed on ALGM earlier due to a weak market. No, I do not feel stock envy or FOMO. Any and every rally will bring about some stocks that look like the shiny new toy of the market … But I do not have to be in everything. I, for one, wait for the great opportunities, and I do not like picking up pennies. Why force it? Does the market now remind you of any major bear market bottom, such as 1932, ’62, 2003 or 2009, just to name a few?
I really don’t see it yet – I see an extended FOMO rally with a minimal amount of leaders showing true strength. If they are so great, they will give more constructive entry points on their way up, which I can capitalize on once the odds turn in my favor.
Have a good one, ’til next week!