Good day friends,
This week was less volatile, and both technical moves and economic news were largely devoid of developments that I would tag crucial for the stock market. Keep in mind that I’ve already been bearish on the current rally for a while; the continued running hawk commentary from FOMC members Bullard or Mester wasn’t too hard of a pill to swallow.
Fed is breaking the market
Without wanting to get into this too much, I feel that every time the market rallies a bit during this last year, there was a Fed official coming out of the woodwork to remind people that the tightening is not over. Almost as if they’re not wanting to look at actual numbers (e.g. ignoring receding CPI, using non-inflation adjusted numbers in sales stats, purposefully misreading labor data, etc) and instead point their all-seeing ‘eye of Mordor’ on the stock market. Perhaps this will lighten soon. Food for thought.
In any case, not much from last week’s report (or from the last months for that matter) has changed in the market itself.
Market remains mixed and choppy
We’ve rallied from mid-October now for over a month. What breakthrough changes have we seen since then? I hope I’m not going out on a limb here to say ‘not many’. As I’ve been alluding to these last few weeks, any strong action is largely seen in names that are not indicative of the market being a strong ‘incubator’ for growth.
Overall, the market had become almost ridiculously overbought. There are times when this is good news, for example in a fresh bull market. But I don’t think we are in one. For the trend to turn up durably, we now need digestion of at least 1-2 weeks but better 3-5 weeks sideways, and then march on to higher Highs on all indices (NASDAQ, SPX, DJIA) to confirm each other.
This would be a good time to read up on your Dow theory – forget about specific indices though, the main idea is that relevant indices need to CONFIRM each other’s moves in order for these to be significant. I want all the indices to turn up, stay above their 50DMAs, and start trending up, confirming each other.
Nothing like that is visible yet, and I will not open any new positions, even probing, until this current overbought state has been wrung out. Tuesday’s churning action on NASDAQ and SPX could and should be the start of such a possible digestion.
Weak breadth on NASDAQ
Another thing I’ve spotted recently is the rather weak action of the NASDAQ Advance/Decline line, compared to that of the NYSE. The A/D line plots the number of rallying (advancing) issues vs those declining in price, per day, over the whole exchange.
As you can see, NYSE issues (which are broad across financials, industrials, commodity stocks, consumer staples, and so on) have been rallying much more actively in this rally, and growth has again been lagging. In fact, the NASDAQ A/D line has almost not budged an inch from the October low, despite the NASDAQ composite rallying a good 13% – indicating a thin rally.
Sentiment remains confident
There has been no sentiment ‘purge’ (any extremely bearish news development or market event affecting stocks, e.g. an equivalent of the various bankruptcies and the recent FTX collapse in crypto) – P/C ratio, VIX, and price-volume action suggest orderly selling, and orderly trending of a largely technical nature, despite the apparent volatility. Market complacency remains high.
Overall, I will be very careful about how I tread. We’re still in a long-term downtrend (consecutive lower Lows on major indices), and individual stock action is not convincingly strong.
Good stocks in a bad mood
I will keep this report short, just a few points:
Solar remains the number 1 growth industry, with FSLR, & ENPH leading. More names are recently perking up, including SHLS and ARRY, but they’re not interesting to look at yet.
Enphase (ENPH) is the solar stock with the best picture of technicals and fundamentals, a clear leader. As you can see, ENPH formed a reasonably small digestion with a volatile & deep platform recently. I share a pivot price level but stated that I would not be probing into this in the current overbought market. ENPH tried to march over this pivot and continue its uptrend twice, first with no volume and last week reversing with massive volume.
This stock WANTS to move out, but can’t, held back by the market. I don’t want to be a perma-bear, and I’ve seen situations like this resolve positively … in a great growth market though, which we’re not in! By now, the handle is wedging up and prone to shakeouts. Exacerbating is the fact that it’s a crowded trade due to the lack of alternatives.
FSLR, another solar stock, is a turnaround – not showing the ideal earnings growth I’d like to see. But its rally against the market makes the impression of a Viking Berserk marching and grunting barefoot through a snowstorm. The mere volume signature makes this likely the best (technical) behavior I can see right now and a leading growth stock. It is, however, severely extended and nowhere near actionable for me. I will wait and watch, great stocks always give multiple opportunities to participate.
Something to watch … but not too excitedly
Another stock I’ve had my eyes on for a while is ASO, a retailer – Federated Hermes and Fidelity have positions in this, and it is fairly liquid. As with many other stocks, the volume has not been amazing, but the relative strength since August and really the whole summer has been nothing short of astounding.
Last week it had two great up-days, while the general market was lagging. Earnings and sales growth have suffered strongly though recently, in line with expectations for this economic environment. This would need as well to digest where it is for 2-3 weeks from now, to become interesting. Earnings are expected mid-Dec, which could lead to a trend continuation or a breakdown. Me participating in this will be conditional on the general market, and how the better stocks perform until then. Probably I won’t. Stay tuned.
Illiqid reigns surpreme
The market is by a large margin led by illiquid microcaps or safe-havens. Excluding ON and GFS, the best moves by semiconductors in this rally have all been by thinly-traded small- and micro-caps, many of which hadn’t shown any life signs since the dot.com bubble. What a splash.
AMRK, RMBS, ACLS, AEHR and more, all showed very strong action recently, and most are extended. RMBS and ACLS have been leading in every 2022 bear market rally, and ACLS has formed a jagged digestion in every single one, so far resolving negatively. ALGM is a more novel story, but the overhead supply is just too big to call the current chart anything but ‘mediocre’. These are all great to keep watching, but none of these mean any meaningful market improvements.
Our old friend CLFD has reacted well to earnings and is on track to win the award for the possibly most-faulty and choppy digestion I’ve seen the last few weeks. Not actionable for me and highly risky to be involved.
Recent IPOs can’t rally
Recent IPOs that had shown promise and relative strength the last few weeks/months keep getting hammered as if we’re in a game of whac-a-mole – XMTR, PRVA, PTLO, TMCI, DV, PAYO. An attempted move above a digestion in asset manager TPG (no growth profile) is sputtering and shows all signs of failing soon. All illiquid, small, almost not relevant. But in a great market, new novel names such as these (some of which with great fundamentals) would at least attract interest to some larger degree than this.
The list of thinly traded ‘look-at-me’ stocks continues, but I will stop here. When your watchlist has more of such stocks than high-quality issues, it becomes clear that the bear market will not resolve itself positively in the next few days.
The death rattle of commodities
There are still some commodity stocks appearing on my screens, but recent attempts of trend continuation in coal (AMR, BTU) have failed and O&G is sputtering. Led by the large-caps SLB, CVX and XOM, extension is high, patterns are faulty and volume is fading – plus, oil futures are tending a southward long-term and intermediate-term trend. I’ll stay away from these as well, too hostile.
Lithium miner ALB has had a violent shakeout after a negatively resolving digestion that initially looked quite good. This is the reason that I don’t participate much in cyclicals, and if at all use a different toolkit than buying moves into new High price.
Gold and copper remain in a short-term uptrend, but whether this is an actual trend reversal and will materialize into a durable uptrend for the longer term remains to be seen. A multi-week tight digestion and a strong move over $1790/OZ is necessary. Not actionable for me right now.
How to deal with this choppy market
That was a bit depressing to read. Let’s lift off like a mighty eagle, and try to spot patterns from a higher level.
If I had to summarize, I’d say a lot of hot air circulating around. A lot of FOMO, and a lot of volatility, but nothing of substance. We are leaving earnings season … and any frenzied justification for the modus operandi to unconditionally fly off the handle on any single-day news is behind us. From now on, we will need convicted money flow.
Dan Zanger said the key to succeeding in this game is to avoid choppy markets at all costs. And a choppy market it is. Gap-ups, gap-downs. Leaders turning to laggards. No follow-up buying.
There’ll always be opportunities – a HALO, an ON, an ASO setting up. But if I can’t do the great, I certainly won’t try the expedient. The real question is, what are the odds of them making me money? When the market is not acting right, when leading stocks sputter or break down, I stop what I’m doing. I don’t try harder, I try less.
I see no reason to raise my long exposure levels to any degree. It is simply not the time to step on the pedal, as we’re in a clear risk-off environment. This will change at some point, and it might even change in the near future. But I need to see reasons and facts – not wishes, desires, or preferences expressed – to corroborate this notion.
This bear market is really starting to wear people down, I can see it in others and I can see it in myself. I for one know though that every bear market is followed by a bull market. And you can only participate when you’re there when it turns.
The knowledge that however bad it gets, it will finally turn around (because it always does) is what will get you through this. This might go on for another couple of weeks, months, or even more than a year. No one knows. But I believe a lot of smart money is parked up on the sidelines, watching for things to change. I am parked right in front, in pole position. Come and join me.