Hi friends,
At the moment, writing these reports is as rewarding and repetitive as emptying the washing machine – it needs to be done regularly, but no great revelations come to light.
The thin rally, mostly driven by systematic short-covering, mega-cap AI sentiment, ETF purchase programs and some cyclicals, is hammering on relentlessly. As before, as good as no other segment of the market is confirming the moves seen in NASDAQ and S&P500 – compare for example the NASDAQ Composite (cap-weighted, almost exclusively driven by a mega-cap tech rally) vs. the Russell 2000 (mid- and small-caps, more representative of the ‘risk-on’ segment of the market):
Whatever market average you look at, you will see the same dynamic – the cap-weighted variety is drifting up (e.g. the S&P500, where 32% of the index move are driven by 2% of the stocks) while the equal-weight varieties are lingering sideways. I’ve written at lengths how such thin rallies are unsustainable, especially paired with the apparent lack of leading stocks.
Lately, more distribution (heavy volume on stalling price progress, or even price reversals) have become apparent again, suggesting under-the-hood selling of large share blocks … not a sign of a healthy market. Especially at the end of the week, inflation and labor data led stocks to gap up early in the day (US, EU) only to sell off later.
Lack of confirmation
The index of interest closest to confirm the recent mega-cap rally are the Dow Transports (DJT), largely driven by upwards guidance in airlines and some truckers. DJT is attempting to perform a trend reversal after making a tentative rally High in early February – so far, this is without conviction and plagued with reversals.
It goes without saying that only the transports rallying somewhat by itself is still not nearly enough evidence for a strong market reversing to the upside.
First reactions to blue-chip earnings not convincing
The earnings season has once again officially kicked off, and from the reaction of market participants to these reports we can read a lot about what’s happening in the ‘composite mind’ of buyers and sellers.
Only few reports of meaningful names are available though as of yet, and we’ll have to await the end of July for a more general picture.
Negative action in the financials Citigroup, Wells Fargo, JPM, or the transport/leisure Delta Airlines, suggest so far that a lot of the hyped information of rising earnings had already been priced into the stock – reversals and sell-offs on strong volume abound.
Leadership remains weak or climactic
The market remains dominated by sluggish industrial, electrical, and construction stocks, defensive healthcare, next to a lot of hype in mega-cap or low-quality stocks with AI exposure last seen in the dot-com bubble. But the excitement is misleading – there is a consistent lack of actionable leading stocks, and more cracks are forming in the stocks that are pushed by amateurs on social media boards (including professional money managers).
Take for example OPRA – a thinly-traded and low-priced stock rallying on AI hype. On Friday, it collapsed 30% on the heaviest volume since its IPO, in a clear topping sign.
Lack of volume (and thus lack of buying demand giving us confidence of a tradable trend) is notable at critical junctures for more low-quality stocks including HUBS, PLTR, UPST, SDGR – but also for the more established names such as PSTG, MPWR, LCSS, FCNCA, BKNG, MSFT, AVGO, FTNT, LTH, TMDX, ON or APPF.
Worse, a lot of high-volume reversals at important technical points in RMBS, AMD, NVDA on volume are accruing, tilting the balance more and more away from the impression of a ‘healthy’ rally (if there ever was one).
Generally, even in stocks that are trading closer to their record Highs, price-action is becoming weak or asymmetric (ANET, ALGM, SMCI, …), which together with the above suggests anything but a tradable market.
Stay vigilant – in reality, there is no such thing as bulls or bears. There are only those that speculate along the lines of the trend, and those against it.
As soon as 2-3 weeks from now, there might be high-quality stocks everywhere, and I’d be chasing them hard.
The rally might also roll over in 2-3 weeks, or it might continue pressing higher without any actionable opportunities. The bottom line is – no good stocks, no profits. Right now, there is few to do except watching and waiting.