Hello friends,
The popular indices have been marching on with commitment to the upside, a great sign when looked at nothing else. The trend is most definitely up for the moment, and we always need to heed the market direction to orient our strategy … should actionable opportunities appear.
Trend remains up, but breadth still lacks
Small- & mid-caps took a much stronger hit during the Q3/4 2023 secondary reaction of the indices, and have so far not been able to follow suit in the SP500’s 2024 rally. In the last few days however, both small- (e.g. SPSM) & mid-caps (e.g. RUT) have shown some inkling of buying interest, which might or might not lead to the confirmation of higher Highs on the popular indices, validating a continued up-trend. We will need to keep monitoring.
However, it is important to remember that these broader segments of the market were nowhere near as successful in their 2023 rally as the popular indices, still stuck below heavy overhead supply, and we should keep reminding ourselves that despite their impressive rallies, the SP500 and the NASDAQ Composite are largely driven by a very narrow set of hyped mega-cap tech stocks and cyclical industrials:
Specifically, A/D lines of the NASDAQ Composite when compared to that of the NYSE show that cyclicals and value stocks have been outperforming in a major way since the 2021 top, leaving the ‘risk-on’ element of this market lacking. More recently since the beginning of 2024, despite the continuing rally in the NASDAQ Composite (largely owing to the extreme heavy calculation weights of the above-mentioned crowded mega-caps including NVDA or MSFT), fewer and fewer NASDAQ stocks have been participating in the current leg up as measured by stocks trending above their 50-day moving average:
In the short- to intermediate term, risk for another correction is rising, though price-/volume action of late suggests that the current melt-up could continue for months. Perhaps the March FOMC meeting will bring a change on a sell-the-news rate cut event? Nobody knows, and we don’t need to know – we just need to follow what the leading stocks are doing to make decisions.
Overall, not an ideal breeding ground for animal spirits – but we need to take the market for what it is. The trend remains up for now, and careful exposure to high-value opportunities is warranted, should they appear.
Some bad action, but overall choppy up-trends remain intact
Some exuberance in the AI, semi- and PC capital goods industries has resurfaced. ARM’s 65% gap-up in a single day serves as a prime example – great price action, but few actionable opportunities. Of course, the most prominent stock right now is undoubtedly SMCI, which has arisen from an erratic and rather late-stage digestion into what appears to be a climax run (>170% in 4 weeks). The volume is exceptional, but the sheer parabolic/vertical advance without any break whatsoever fits the bill of a stock which might soon be due for stalling and heavy risk of distribution. Turnover of the share float has risen dramatically (currently roughly 15% per day).
On the other hand, similarly behaving RMBS & FN have collapsed badly on earnings, and severe volatility has ensued, making their trends (at least in the case of RMBS) most likely.
Spotting such signs in leading stocks is at best a yellow flag to be heeded. However overall, the up-trend in most leading stocks continues – it’s just that they give as good as no opportunity to join while properly controlling risk.
Conclusion
I remain with some long exposure in strong Japanese equities and options income trades in a broad range of assets – should low-risk entry points appear in US high-value plays, I will increase my exposure. For now, I see mostly crowded plays (I leave the NVDA’s and MSFT’s of this world for the retirement funds of this world) and a general lack of novel unknown equities making tremendous runs, the latter being the target of my main strategy. Let’s see how things unfold.
So long,
TGS