Hello dear friends,
The market has had somewhat of a bounce of the last few weeks, and indices are again at the decision point where they are running into trendlines and long-term moving averages – both trending down, both long-term.
Short-term yields are and remain high with the current Fed policy, and substantial capital is unlikely to revisit the stocks market until there is a change in monetary policy. Less so lower rates in my opinion, but more a stop to the bleeding of system liquidity via bond dumping. This will most likely happen when it becomes a bit more easy to see through the fog of the incoming recession, unless there is a black swan event that will require surprise central bank intervention once again.
Index action remains subpar
The indices have drifted again back up to resistance levels, and specifically the volume of the S&P 500 in this move has been anemic. I would want to see strong buying entering the market, not just a relief bounce such as this .
Over the last couple of days I’ve read many reports and articles that suggested institutional money was done covering shorts (one reason for the dead cat bounce), and the S&P 500 closing above its 200DMA (even if only minimally) was an immediate bullish sign. It was argued that the 200DMA was resistance so far in this bear, and a breach of it should be a herald of a better market.
However in fact, if we count a Close above the 200DMA as a breach, then the declining 200DMA has only been resistance once in this bear (August rally, see chart), and thereafter had already been breached minimally before in December prior to selling off once again.
I don’t concern myself with such isolated indications. A major index closing above the 200DMA is a good sign, but only if it is corroborated by other way more important bullish factors … which are so far absent. I’m talking sentiment, industry emergence, and most importantly, stock leadership.
If people want to do vain analysis of indicators such as a 200DMA breach in a vacuum, I’ve got another one for you. Compared to all previous bear rallies in history, this current bounce has overstayed its welcome by a wide margin, and the odds of it continuing are more than 3:1 against. Again, stats in isolation are useless, but unless something monumentally bullish and unexpected happens, I see no strong bull market arising soon.
Indices can always rally on, but you have to look what drives them to get a clear conclusion on the climate you’re in.
Breadth and leadership thin, markets extended
While NYSE stocks on average have rallied stronger, this group is full of defensive safe havens, which are currently favored by the macro environment. Healthcare, aerospace and defense stocks, miners and industrials/resource, insurance companies and food stocks. Uninspiring at the very least. NASDAQ stocks have been lagging for many months, and continue to do so.
This bear rally cake is topped with one of the most overbought environments in a while. The options volume ratio is very low. The VIX is at a 1-year Low at around 18. The cumulative metric of all-exchange advancing issues is the most extreme it has ever been since my software can get numbers – at least 15 years. Keep in mind we’re in the depth of a bear market, and far from a lockout rally where I could ignore this for a while.
The composite picture is that market complacency is extreme. An impression that fits well in the picture of renewed meme rallies (CVNA, BBBY over 360% in 4 days!) and retail dip-buying mania into past darling stocks. The last few times that meme stock rallies were staged in this bear, it was within a handful of days of the local top of bear bounces (29 March ’22, 16 August ’22).
Stocks act bad, then worse
I detailed negative price action of important stocks in the last week in this article. This action was very concerning but also confirms what I think is the start of the inevitable roll-over of this market in the next handful of weeks – unless something monumentally bullish and unexpected occurs.
We are more than 3 months into this rally; where is the good action? Where is the firepower that is the harbinger of the new bull market? As far as I’m concerned, it’s cowering somewhere in a dark corner, hiding.
Earnings season has officially kicked off, and we can once again expect more volatility from it. JPM, C, WFC and BAC were the first to report, with not all great numbers but so far supported price. We will see.
Cyclicals continue to shine
Industrials/machinery/capital goods producers (and those found in defensive-heavy indices such as the Dow Industrials or many European averages) continue to hold up well, or even attempt to move out. CAT, DE, URI, GE, FLEX, JBL … perhaps the weakening dollar helps the overseas trades of these global companies. CAT is actually leading into New High ground, but for my taste on questionable volume. In any case, it’s not the type of stock that will coax the majority of institutional money from the sidelines.
Copper futures prices continue to act very strong, following small rallies in precious metals gold and silver. All three of them are now digesting their prior moves. Some strong stocks within can be found, notably SCCO which is under massive accumulation. Still, overall there is no clarity yet in these moves. They outperform for the moment, but many stocks (e.g. SCCO, and specifically most gold miners) and commodities (e.g. Silver futures) have not even technically and properly reversed their multi-year downtrends quite yet.
On top, steel stocks have attracted some buying, although STLD is the lone stock worth mentioning, while oil stocks again are trying to buck the downtrend of the underlying. Most oil equities are in very weak technical positions regarding price and volume action, and earnings volatility is approaching fast. For the moment, nothing I’m interested in.
The advance is failure-stricken
Those stocks that actually did try to move with the market on average ran into problems right away. IBM is a great example of this phenomenon: A rally with the Dow Industrials, a quite vicious and rising-volume break, then the stock can’t rally.
The semiconductors are another prime example of this: XSD (semi ETF) showed a complete lack of commitment and volume buying during this recent rally. Of course, it is only an ETF. But you can look at other stocks that tried to rally. Check out AVGO or LSCC. AVGO ran into selling immediately upon trying to hop over a meaningful pivot (not really a buy point, but still). While the better-grade semis did go nowhere, a group of thinly-traded tired dogs from the dot.com bubble are moving out meaningfully into New Highs, some of which are flat out blowing off.
As discussed, AEHR and AMKR (but also ACLS and RMBS to a large degree) have highly faulty characteristics in their previous digestion patterns regarding price-volume action, and the current moves will likely be faded once the market shows some weakness.
In fact, a lot of volume that showed up during this rally was again in dead past leaders and many stocks substantially off their respective 52-week Highs. This shows dip-buying and short-covering.
More weak action could be found in a recently leading sector, the defense stocks. They had rallied as strong as one would expect from such old cows after the start of the Ukraine war, but many have now sustained quite heavy blows. LMT sold off to just above its 200DMA, while NOC gapped violently below it to put and end to its current uptrend.
Even in the recently-stronger healthcare sector, many individual stocks have started sputtering – from larger established blue-chips (REGN, bear trap in ABBV, etc.) to more novel leadership material.
A strong volume inflow occurred into solar stocks. But here again, the characteristics of this event makes me doubt sustainability. While the turnaround stock FSLR is the current leader of the industry, it received the least amount of buying, trying to move up on relatively limited buying along the index rally.
On the other hand, the beaten-down stocks of the past, swimming in a pool of overhead-supply within faulty digestions, received massive buying – CSIQ and JKS, for example. CSIQ, which is in a choppy sideways trend after its early 2021 top, rallied >40% in the last few days. It’s good if it can continue for up to $60 or $70, but it’s a mess where it is sitting right now.
An interesting new stock
I’ve written about CPRX before: It’s so far courageously resisting the bear since the end of 2021. It’s a fairly young stock, unknown, sporting elite top- and bottom-line fundamentals. Right now, it’s extended, not actionable.
But it has recently managed to move above $20, a price and liquidity level that will permit many institutional buyers in the future to start participating in the move.
I hope it can survive the next down-leg in the markets that I expect to happen in the next weeks/months. If it can hold up, and perhaps offer a low-risk entry point right around when the market turns, it might turn out to be a very worthwhile prospect for a speculator.
I will remain flexible. If this rally improves and better leadership shows up, I’m willing to turn on the spot and start probing long positions. But right now, I have a really hard time seeing this happening, and will protect my capital by staying in cash.
Let’s see what the new week will bring. At the very least, the market has to work off that extremely overbought and complacent state, which is almost ridiculous to see so deep in a bear market. Bottoms are usually accompanied by quite the opposite.
I’m willing to learn of course, but although history doesn’t repeat, it very closely rhymes.
Stay safe!