Hello friends,
In financial markets we have to force our opinion to take a seat in the back of the car, and follow what the market and our strategy is dictating us.
Despite my weariness of the thinness of this market, the MVS has ticked to 4.6 (a ‘moderate‘ quality measure) and the trend of the major indices remains up. Thus, the best play is to follow that trend and play it should high-value opportunities arrive.
Below is a chart of the IWM (Russell 2000, representative of the more explosive small- & mid-cap segment of the market), or more specifically, its relative strength against the SP500 (SPX) which is carried in a third of its movement by about 7 mega-cap tech stocks. Though the trend of the SP500 is clearly up, there is not a whole lot of firepower in the general market. Indices like the Russell 2000 have not rallied since the beginning of the year.
As previewed in the previous report, this week was characterized volatility events – a Fed announcement (“The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent”) and mega-cap tech earnings reports.
While on Wednesday many leading names pulled back, led by GOOGL the more hawkish stance by the Fed did not bring any panic selling in the FOMO stocks such as AMD or META which continue to grind up after harrowing drawdowns in 2023.
Some leaders exist, but no actionable opportunities right now
One of the best group moves as of this movement are coal stocks, specifically led by AMR. This is a monster of a mover since mid-2023, but is extended right now and in need of digesting the prior advance. An opportunity might set up in the next few weeks/months.
Apart from coal, leading groups are capital goods (electronics, construction equipment, industrials) and some tech names (again, largely mega-cap tech). Interesting tickers are VRT, IOT (potentially forming a digestion right now), SMCI and ARM. NXT has established itself as a new high-quality stock, and will be on top of my watchlist from now on. However, none of those above are buyable right now. SMCI has just moved out of a very erratic digestion into a somewhat parabolic melt-up – I did not participate due to the low quality and thus high-risk of the move of of the digestion, specifically into the earnings announcement a few days ago. Keep waiting for low-risk entry points.
This is also the exact catch when saying that the trend of the market is up – there are as good as no low-risk opportunities even in the better stocks. There is a lot of strong and even parabolic moves, but a great market will give you a multitude of this number of stocks around a market bottom while letting you get in them if you are ready.
Conclusion
The market has undoubtedly improved, which however is also only a relative statement. It is not a great market ripe for harvesting of profits. I believe some gains could be made long the right stocks, but the melt-like character of the indices and tech mega-caps paired with a relatively thin list of well-behaving novel movers from the small- & mid-cap arena remains a yellow flag to keep one foot on the breaks.
So long,
TGS