Hello friends,
We’re now almost past earnings season, and all of the impactful and liquid stocks have reported their financials. Good reactions, bad reactions, mixed reactions, a colorful blend of volatile moves that has brought the two popular indices SP500 and NASDAQ Composite close to recent High price ranges, brought to you by FAANGM a.k.a. the most overcrowded trade in the market.
As I described on numerous occasions before, this rally is extremely thin. While the NASDAQ has somewhat been moving up, the advance/decline line has actually made a lower Low in this bear market, stocks making new Highs in price have all but evaporated – emphasizing more that the breadth of moving stocks is to the downside. Reminiscent of a house of cards.
A better representation of where the market is at is the Russell 2000 (RUT), representing mid- and small caps, and the IWC making a 31-month Low, representing micro-caps. There is no improvement visible here, only underscoring the precarious gap between the wider market and the FAANGM rally in the popular indices:
NASDAQ is so far stuck at the $12,275 level, and not even the overblown rally after NADSAQ’s biggest horse Apple (AAPL)’s dubious earnings report of 0% EPS growth and -3% Revenue growth could bring it over that level. No other index excluding the SP500 which is equally enriched with the ever-delusional FAANGM trade is corroborating this dynamic. We might need to see a fake-out over this level, followed by a general rolling over, for this chart to follow the rest of the market. But even if it rallies above it and holds, the mere presence of well-performing indices does not mean that this market is in any way conducive to speculating well in stocks.
Selling abounds, volume in rallies dries up
The market can often be confusing for newcomers – how can the balance of trading be on the sell-side, while indices are advancing? Well, it sure can – for example on NASDAQ. In fact, 7 out of the last 25 trading sessions were biased towards selling volume, while rally days with few exceptions attracted neither volume nor significant moves in high-quality non-defensive stocks.
The rally is standing on thin legs that are starting to crack, but remember that bottom-fishing and “Safe Bet Investing” by the ever-gullible Big Tech institutional fanboys can keep the market afloat for longer than one would think or hope. Worse, the leadership of the market is clearly biased towards market participants’ defensive playing and risk-off sentiment – the opposite of what we want to see.
Weak leading industries remain
After strong selling came into the last leading semiconductor and solar stocks (e.g. ENPH, FSLR) over the last few weeks, the picture of money rotation has cemented even more heftily. Large institutional managers are hiding in consumer staples, especially food and brewery stocks (e.g. TAP, MNST, PEP, LW, HSY, MDLZ), large large-cap bio-pharmaceuticals (e.g. LLY, VRTX, European defensive healthcare such as Novartis, AZN, NVO), fast-food chains (MCD, QSR, YUM), or a host of other recession plays such as car part manufacturers or dealers (ORLY, AZO).
Meanwhile oil has slumped, while gold continues to form a strong group move – clear indications that future economic expectations by the well-capitalized part of the investment community have not improved.
A silver lining
A light of hope, really more for the economy than the stock market, is that homebuilders and construction materials might be discounting strength far ahead. I wouldn’t call this a sustainable group move yet due to the limited participation, however some great rallies and new High prices in many stocks are appreciable (e.g. BLDR, PHM, TPH, GRBK). In any case, these are not actionable moves.
Leading stocks mixed after weeks of slaughter
Better-quality stocks in the market are not showing committed speculation either, and precarious choppy trends that are difficult to navigate if one’s wish is not to get slashed to death by a thousand cuts.
Earnings reports and forward guidance, whether good or bad, has not been merciful with many of the leading names. ANET has imploded on an exceptional report and even a small consensus beat, giving more insight into the sell-trigger-happy speculator community, and following recent collapses in other tech names including PI, MBLY, AEHR or ALGM.
PERI, which had been one of the more rising stars of late, has shown a similar change of character – a bad earnings reaction and increasing volume as it crashes through support levels. This move does not have to be over, but there are definitive dark-orange flags being raised.
RMBS managed to recover somewhat on mediocre earnings and a consensus disappointment. The only other left interesting semi stock, after RMBS, is ACLS – showing earnings deceleration, but it’s initial sell-off found support quickly after the news came out. However, this and the old horse from the dot-com bubble RMBS cannot hold up the group nor the market alone.
New names that are appearing however are PEN (which just reported >1000% earnings growth on a 111% beat on expectations) and WING (30% beat), both moving into new High prices and, should they hold, possibly rising to the ranks of leading stocks unencumbered by anybody trying to recover funds who bought at higher price. Add ONON to the list, which is still holding well, but still far from actionable.
The last few men of the cavalry still standing are LNTH, SWAV and SMCI. SMCI is the clear leader of the pack, which company pre-empted a bad financial report with prior warnings and lowered guidance, and thus the stock staged an almost climactic move. Whether or not SMCI can re-digest more healthily or not, for the moment it is, together with LNTH and SWAV, probably the most crowded growth stock and should be avoided in a thin choppy market like the current one. The same goes for LNTH and SWAV – LTNH is currently trying to move out of a low-quality digestion after its earnings report, and follow-through buying is already stalling on the day the NASDAQ gaps up a few percentage points. It can still move on, but the odds are dropping consistently, and risk rising. Not great action, but as expected so far.
SWAV is in a similar situation as LNTH, but has not shaken out/pulled back and presented a “platform” which serves to get rid of short-term supply risk from the >70% move off $175 to $300. As I said, it’s also one of the “All-Eyez-On-Me” crowded stocks, weakening its position even more. Thus, it is technically in a poor position, and while a likely positive report might catapult it up, there is a high risk of the stock whipsawing hard once the general market runs into weakness, which is not too far-fetched an expectation.
Conclusion
The market index moves are predicated by action that can only be described as a group of drunk adolescents shuffling over a frozen river with exceptionally thin ice. Money has and still is rotating into safe havens, while leading stocks remain volatile and of high risk of massive shakeouts.
The environment is choppy, and clearly not conducive for speculation in high-alfa stocks. I’m currently engaged with other foreign markets, as the US “growth” equity playing field is a wet slippery slope as of this moment. I suggest you do the same.