Hello friends,
In the swirling vortex of these past weeks, let me drill into your skulls an ancient truth – never underestimate the market, especially when it’s on shaky ground. Never turn a blind eye to the relentless seduction of FOMO and the lingering hangover of euphoria.
This market remains a wild beast that refuses to stay down after taking a punch, akin to everyone’s idol Rocky Balboa. Will we ascend to the dizzying heights of old- or, hell, even all-time price Highs on the indices again? Only the future, that elusive soothsayer, will tell.
However as of yet, once again I can’t shake the feeling that Rocky, or in this case, a legion of amateur market participants, is staggering back on legs more wobbly than a newborn foal. We once again observe the whims of a capricious conductor, but I reckon the ever-thinning breadth of the market might soon lead to something more gut-wrenching than a tequila shot on an empty stomach.
A ludicrous rally brought the NASDAQ Composite (COMP) within 2.5% of its July Highs, while the Russel 2000 index (RUT) gapped 5.4% in a single day, the second strongest move since the COVID crash.
Traders and “investors” were lured yet again into the old mega-caps and collapsed past leaders courtesy of the Fed quasi-suggesting the end of rate hikes (at least for the time being) after yet another inflation report that really brought … no surprising news to the astute observer.
The indices, and in particular, the NASDAQ Composite and the S&P500, propelled forward by a small handful of mega-cap stocks like a runaway train manned by a lunatic feverishly shoveling coal into the insatiable maws of the engine, are now stuck a a steep angle in mid-air like a frozen rope, somewhat though not critically overbought.
A new genuine rally?
On days such as Tuesday, but really more like the last 2-3 weeks, when indices gap and emotions run hot, it’s of paramount importance to not get carried away by the childish screams of those wanting the market to do something (in this case rally), to detach from the buzz, take a step back and a look at what’s really happening.
Is the market truly guzzling with new great stocks in great low-risk states entering free price exploration, all amidst a broad move, and confirmed by the indices? Of are the exuberant index rallies largely driven by bounces in previously sold-off value cyclicals, crumbled past leaders, and dip-buying in blue-chips?
What were the largest movers on your watchlist, or rather, in the whole market, during this time? I’ve seen crap like ENPH, UPST, or DKNG rally 20-30% or more.
Where stocks near new price Highs freely entering price discovery? I’ve seen stocks and ETFs drift up on feeble volume into all-time Highs, e.g. XLK, MSFT, DELL, AVGO, KLAC, IT, FICO, SNPS, BESI or CDNS. AMZN & META are near 52w-highs, on very questionable price-volume action.
What types of names lead to the upside? Next to the blue-chips that just don’t die like the annoying side-kick of a movie villain, earnings-stability laggards, industrials, tired capital good stocks and/or construction issues lead – stuff like GPI, HLT, PCAR, CDW, NX, QLYS, ROP, TT, UFPI, CPRT.
Is the rally being led by massive volume expansion and strong price action defining leadership in novel high-quality stocks? I see reluctant action in VRT, MMYT, IOT. Shining star DUOL could turn into something good, but it’s too early to tell, and by itself it won’t make a market charge.
Is supply and demand absorbing each other in elegant digestions? I’ve seen nothing of the kind – RMBS, PSTG, ONTO, APPF, SMCI and more all form erratic price consolidations, if you can call them that at all.
How are the media doing? I’ve seen utter rubbish being praised as the new leadership to put your money into: MELI, NET, TSLA or AMZN. Pure FOMO. Near true bottoms after a prolonged bear market, everyone is bearish, not euphoric.
Conclusion
As you can tell from the style of my writing, I see no reason to put any money to work for speculation in stock trends right at this moment. The strongest stocks of the market are not worth playing in, so why should I do so in anything else? Risk comes always first, and here risk clearly and utterly outweighs reward in a low-odds market environment.
NVDA, the ultimate AI FOMO stock, has been up for 10 consecutive sessions, and is near all-time Highs, despite a 70% correction in 2022. In a healthy market that has purged its previous excess, all-eyez-on-me stocks like NVDA simply don’t collapse 70% and then rally 360% in less than a year, all a short while after a long-term bull market top has formed. Next to MSFT’s price action, it’s a clear sign that the AI exuberance has not dissipated, and I believe this week’s earnings reports of NVDA and DELL will be a large tell on how the next few weeks/months will look – be it to the up- or downside.
So long,
TGS