Hello friends,
The NASDAQ Composite had its strongest half-year performance sine 1983, posting a 31% run YTD. Its little brother NASDAQ-100 went even further, logging its biggest half-year return on record, with a 39% rally.
As I’ve been repeating over the last weeks and months like a broken record, the S&P500, NASDAQ Composite and NASD-100 are extremely heavily weighted towards a small subset of mega-capitalization tech stocks – this rally has almost exclusively been driven by all but 7-9 stocks, while the other 98.5% of the S&P500 (and about 99% of the NASDAQ) has been lingering sideways or staging minimal up-drift due to sentiment spillover.
And thin markets driven by nothing but sluggish blue-chip are precarious markets.
Ironically, apart from these tech mega-caps, the industries that perform best in the market are classical cyclicals & “value”-propositions mostly found on the NYSE – however, the NYSE Composite is not confirming this rally by a long shot (in line with every other index excluding NASDAQ Comp and SP500). Equally, the majority of NASDAQ Comp stocks (as expressed by a summary statistic of advancing vs. declining issues) have been in a consistent down-trend for years now, and continue to do so despite the recent flare-up of Big Tech blue-chip “safe” betting and AI stock gambling reminiscent of the meme stock craze in 2021.
A lot of turmoil came to market last week (for example Apple’s $3T cap milestone, a slew of economic metrics, new Fed “celebrity” speeches), but then also nothing at all – people are not really long equities, they are long FOMO. I’m not one to spurn a good thin market rally that everybody is afraid of, or even bubble-like melt-ups, but I don’t speculate in crowded and extended blue-chip tech stocks like NVDA, AAPL or MSFT that creep up slowly. I speculate in the rare unicorn roadrunners, the superstocks that can make a couple of hundred percent in a year. Their debut usually heralds the beginning of a new bull market, which is quite the opposite of what we’re seeing now – over-bullish and complacent amateurs, and thin rallies in obvious names, and no new strong stocks. And ‘obvious’ almost never works in the stock market.
Cyclicals lead, earnings season ahead
After closing out the first two quarters of 2023, we’re about to head into the next earnings season, which will probably bring some liquidity to this market that is already dry like a nun and about to dry up more during the impending dog days of summer in August.
As indicated above, once you step back from the tech mega-cap craze, there is really not that much enticing substance to interact with in US equities – the market is led by low-priced and thinly-traded low-quality AI FOMO stocks on the one hand, and on the other by industrials, machinery, electricals, construction, homebuilding, and more recently transports (some truckers, airlines, cruise lines).
Though the latter two are good indications for a budding market, there is a general lack of institutional appetite for risk-on stocks, as capital flows into sluggish and old names in a week-by-week alternating rotation rather than systematic accumulation. In short, even in the industries that show some movement, it is restricted to uninspiring and low-quality merchandise, and there is a general absence of genuine opportunity.
There is really not much more to be said right now – go with the masses, buy some extended AI stocks buried under massive overhead selling supply, or some crowded and extended mega-caps, and hope for the best … or await better times to make the true money, and look elsewhere. Because hope is not a strategy, I strongly recommend the latter.