Hello dear friends,
A very happy and successful new year to everyone.
The ludicrous melt-up into the new year has continued – we’ve seen new Highs on the Dow, and the 2023 Highs crossed by the NASDAQ Composite while the SP500 is hovering near all time Highs (all large-cap indices). Other averages, such as the RUT (mid- & small caps), are equally near 2023 Highs after an epic parabolic move without any break starting in November last year.
The media are awash with headlines that stocks are doing just fine – of course, that assessment depends heavily on how you define ‘stocks’. Central bank activity, and the expectation of such in the future, can move the market averages to unseen Highs and Lows, and I had been indicating on numerous occasions that new Highs on the indices were by no means out of the question, judging on the FOMO in this November and quite frankly FY 2023 rally.
Long-term ‘investors’ will use 2023 of an example of how a simple buy’n’hold strategy will outperform most others – but in the same sentence they forget to acknowledge that they are the exact group of people that sat right through the 2022 drawdown, and are now merely at breakeven. The question is, what will the future hold?
As I’ve indicated, stock market manipulation by small actors often ends in jail, while for large ones is referred to as part of monetary policy – and this is just what we might be seeing here. The central bank can keep markets afloat and rallying for one or other reason for months and years, however the past has also shown that those ‘buying the dip’ shouldn’t count on that too heavily. The market is a beast of its own kind, and many a bear market has only just started when central banks started cutting rates again.
In any case, the market is currently highly extended on the upside, and a correction, even if just a little one, is necessary. Perhaps this will bring some life into new leading stocks? Only the future will tell.
So far, a clear rotation in 2023 out of many tech names and eventually defensives into typical late-cycle cyclicals and value plays has happened. As a broad pattern, money has irregularly pushed into industrials and capital goods stocks, including construction, homebuilders, heavy machinery, and electronics. In short, uninspiring issues that so far offer few to no low-risk high-reward opportunity.
What about the leading stocks?
When you are more inclined to time your entry into the market and optimize your returns massively using leading stocks, however, an alternative picture to the index bonanza has been forming.
Thinly-traded and illiquid issues popping up all over the place to lead, higher-quality stocks in jagged late-stage digestions or moving straight into new Highs from local bottoms, lack of follow-through buying demand, or just the abysmal lack of quality leaders in the first place are merely a few pointers that show us that not all is gold that glitters.
Historically, many tops have formed during such times – for example, look at the 1973/74 top of the Nifty Fifty stocks. A group of blue-chip stocks that could be compared with today’s Magnificent Seven (Apple, Microsoft, Tesla, Nvidia, etc.) dominated the market, and the indices melted up to new Highs, all while the rest of the market was continuously thinning … and the ensuing correction wiped out most of the Nifty Fifty stocks, leading to many of them delisting or today being but a ghost of their former self.
The shape of the 1971-73 market has an eerily similar shape to today’s rally as shown below. History does rhyme, however this is not a prediction of course what will happen – but we need to keep in mind that there is precedent for such a market to roll over while not producing significant low-risk high-reward opportunities in individual stocks until the very top, whenever it may be.
Apart from the cyclicals, the old meme and retail FOMO stocks that have been whipsawing periodically over the last few months/years have again bounced somewhat of their bottom – HOOD, WEAV, AFRM, UPST, and many more. On the other hand, old and thinly-traded crap from the far past such as AAOI or PLAB as been shooting up in erratic trading – all signs of a general lack of institutional accumulation in growth stocks. The ever-FOMO AI stock SYM is pulling in more retailers in the formation of a late-stage distribution top.
The few high-quality names there are have equally been lacking in commitment – DUOL, ARM and IOT are stuck and crawling at a time where they should be rallying hard on follow-through buying demand. VRT is drifting with the market in sluggish deference. This is not behavior we would see if this market was truly the ‘new bull’ that the media are selling us.
In conclusion – the signs we need to see (a strong group of leaders making strong advances) is nowhere to be seen. This market might keep rallying on the surface until the 2024 election – but until strong merchandise shows up across the market and offers low-risk entry points, my money will be on the sidelines or in income-generating strategies.
So long,
TGS