Hello friends,
Although central banks have been raising rates since over a year in a drastic manner, many parts of the western world only show limited slowdown of the labor market. Creation of jobs, people working these jobs & wages rising all leads to more wages being spent – in turn creating a strong consumer that is also living beyond their means via credit. Strong demand, price pressures, more stubborn inflation. Job creation is still rampant and unemployment dropping, in the face of the tightest monetary conditions we’ve seen in a while. Sooner or later however, the hangover for the labor market will kick in, and first signs are starting to appear here and there.
Currently, the market corroborates those suggesting that the pain is not over. We remain in a range-bound choppy market that could be traded in the short-term swings by those possessing the relevant skills – something that is nonetheless done a lot by those that don’t possess them. Another idiotic rally in c3.ai (AI) stock has attracted the eager amateur, a rally which has since collapsed on strong volume. Such speculative blow-offs in no-earnings stocks that trade below massive overhead selling pressure signal classic retailer FOMO action i.e. yet another suggestion that complacency hasn’t worn off.
Stronger trends, however, are not found easily. With regards to these, I find emerging markets more interesting, for example China. The Chinese economy and society as a whole has received a lot of flak lately, with many prominent figures in the financial world shouting doom and gloom from the rooftops. The way I see it, Chinese stocks as a group are holding up better than most at the moment, and I am starting to find a small handful of shares that might become interesting prospects soon. Of course, Chinese equities are propped up by never-ending free money creation and recent lowering of reserve requirements – and, since our world resembles a globalized trade pandemonium, growing money supply in the east can remain a contributor to stubborn inflation in the west.
Indices chop in a shortened week
Expect this to be a short report, as last week’s action was in my eyes not fully representative of where the markets are heading – a lot of money managers are on their yachts or at the country house over such periods, resulting in anemic index volumes and lacklustre trading. Compare charts of the NYSE Composite and the NASDAQ Composite over the last week, but also the last half a year:
While from October to the end of last year the market had rallied more broadly but still focused on defensive sectors, gears have changed since then. The tech mega-caps that make for the bulk of the move of the NASDAQ now 1) serve as safe havens in a “hot-air balance sheet” environment, and 2) remain the main constituents of most tech-pious money managers’ fund prospects who indulged in some quarter-end window dressing in the last few days/weeks to prop up their boni.
Suffice it to say, there is not much holding these indices up, and the broader market is clearly signalling a prolonged risk-off scenario.
As a side note, a few of the old tech darlings that are driving this rally (e.g AAPL, META) are now running close to their long-term down-trend lines, frequently a fading/selling spot and prone to reversals in price. Note also volume trends trailing off over the rally.
Money rotates between defensive industries
We remain in a still complacent market that yields few interesting propositions. The fact that the more than a century-old industrial conglomerate General Electric (GE) can rally >100% in a few months, while there are few true high-quality stocks displaying constructive price/volume action, is another stroke of the brush in the picture that is forming – large institutional money hiding in defensive industries and cyclical “value” stocks.
More electrical industrials continue to lead, although in a heavy chip-chop fashion. This is likely related to the recent push in semi-conductors. This comes along with some more positive action in construction stocks and homebuilders. However overall, the quality of any move is far from constructive – all the advances that a few homebuilders staged above recent and small digestion patterns were almost immediately rejected (e.g. TMHC, MTH, SKY), similarly in the semiconductors ADI and CRUS. Not a sign of a good market.
Additionally, strong selling mid-week in many construction services and heavy machinery/capital goods stocks that were previously leading (e.g. DE, CAT, PH, ATKR, TT, GWW, WSC) could be observed. This could be a blip or the start of something larger, but in any case it shows that even leading names do not offer opportunities for worthwhile gains these days.
Other leading groups that remain in the ‘better’ segments of the market are cosmetics, food, consumer staples, and a renewed rotation into large bio-pharmaceutical staples/defensives (e.g. LLY, JNJ, AZN, VRTX, BIIB, REGN, MRK, CAH) – all more nails in the coffin of a recovering market.
Commodities have received more attention recently. Oil spiked a little on the recent OPEC production cuts (e.g. XOM, PSX, SHEL, FANG), but not all individual stocks held up. Even if the price of the underlying crude oil should spike as a result of the OPEC cuts, such does not necessarily have to translate into oil equities. It is too early to tell with such a recent development, however so far stock action in the oils has not been overwhelming as a response.
Gold, of course, is still on a tear – in fact, it’s been strong for many months. Recent fears of a contagion of bank insolvencies have sparked a move into this classical safe haven and brought it’s price close to a multi-year high. The miners of course have benefited off this dynamic, many moving up quite meaningfully but most far from actionable. I commented on AGI a few weeks ago, however these are such slow movers that they’re as of this moment not worth the risk for me.
Better stocks stall or trade lacklustre
There really has not been much action at all in high-grade growth stocks of late, which in itself is a telltale of the quality of this market. Truly interesting at the moment is only FSLR, a turnaround stock from the solar industry that is rallying on large projections of future earnings in ’23/’24 from national policy changes. FSLR looks to be forming a digestion, and earnings will be due in 2-3 weeks. It’s one of the strongest charts out there, but it has absolutely zero group confirmation.
All other stocks are either extended and trading choppy, or sideways without any constructive volume patterns. AEHR, one of the most recent leading stocks, is continuing to show strong selling and lack of supportive action, another notch in the belt of the bad action that afflicts this market.
Few to no opportunities, and a lot of whipsaws that shake out those relying on proper risk control to be able to live and fight another day, are rendering my market operations low-key – in fact, I’m 95% restricting myself to watching from the sidelines. The odds have not improved over the last week or rather over the last year and longer, thus even if a certain opportunity should show up I am unlikely to risk any money on it.
Speculating in the market at the moment is like trying to sail when there is no wind. You’re just wasting time and energy – just wait for better days.