Hello friends,
As I pointed out the weeks before, the market had become mildly oversold (i.e. become attractive to dip-buyers) and it was due for a bounce.
Well, here it is in the flesh – the most feeble and low-volume bounce the markets have seen in a while.
The popular indices of NASDAQ Composite and SP500 (i.e. the megacap-biased averages responsible for the 2023 rally) have run up back above their 50-day moving averages, followed at the end of the week by similar dynamics in mid- and small-caps (e.g. S&P400, the Russell 2000 IWM, or the Russell growth-segment ETF IWO).
Notice specifically the dropping below-average volume in the bounce, compared to the high-volume selloff from the July peak, as well as multiple instances of high-volume churning (hidden selling) within the bounce:
Commodities start leading again
The most noteworthy change was a reaffirmation of the trend reversal in commodities across the board – the basket CRB commodity index is pegging higher Highs again after a yearlong downtrend since 2022, raising questions again about the relative future of important commodity prices such as cotton, oil, food basic materials, energy resources and thereby on the future of consumer inflation.
Specifically, a bunch of coal stocks (e.g. CEIX, AMR) have started leading to the up-side:
This is in line with continued strength in the oil & gas sector. In fact, the current two top groups of this market comprise stocks from the cyclical producer manufacturing group, specifically the construction/engineering industry, and of course still oil & gas resource stocks.
There is clear group confirmation by a large set of stocks in each of these, and leading opportunities can be found for example in STRL, MOD or VIST.
The caveat is that even here, most of these stocks do not really possess the characteristics I require for putting serious money to work. However if low-risk opportunities set up, swing-trades could turn out profitable here. On the other hand, there is no need to rush in – the big money will be made when the real turn of the market comes.
As well, other defensive and late-stage laggard groups have started showing renewed money inflows, including low-cost thrift stores and the insurance industry.
Overall, the message from sector rotation is clear. Capital is flowing into industries typical of those outperforming during the late top of an old bull market. Money can be made in the right segments of the market, but most certainly no big money which would require a setup of virile growth stocks showing strength.
And there are only very few of the latter, not enough to risk serious money on – the best stocks right now are IOT, VRT, CELH and ACLS, though the latter two too do not typically qualify anymore as leading stocks with massive potential. Also, remember that this list might change within a few days or collapse completely.
Conclusion
Below the surface, AI euphoria is still present – the way the old slug DELL jumped 21% in a day and into new High price ground due to the mere mention of AI in their revenue guidance (similar to AVGO a few months back) is testament to that.
In turn, this only reaffirms that the environment remains volatile. This bounce might have shown highly unfavorable dynamics so far and is unlikely to conjure up an animal-spirits market, but we might continue to see choppy up-wards biased trading and perhaps even new Highs in the indices. Never underestimate the dip-buying mutual funds of this world and their power to have the markets drift up further.