Hello friends,
if there ever was any power in the first place in this bounce starting August 18th, it is more and more waning.
Every attempt to gain higher ground by the indices is on weak below-average volume, largely catalyzed by this or that odd news item in the large-cap stocks, while selling is retaining dominance in intensity. About a third of the price action of the last few weeks can in aggregate be summarized as overwhelming selling, although once again the mega-cap bias of NASDAQ Composite (& QQQ) and S&P500 (& SPY) has masked much more severe weakness across the rest of the market (mid-/small-/microcap segments).
Compare for example the NASDAQ Composite (COMP) vs. the mid-/small-cap “growth”-segment ETF IWO, over the last 2-3 weeks:
There is a clearly amplified intensity in the angle of selling, signaling the continued systematic distribution of share blocks across the market and a lack of “risk-on” sentiment among institutional money following the negation of a long-term trend reversal back in July.
On Friday, the popular indices once again closed below the 50DMA on volume (of course to a large degree determined by last week’s “triple witching” derivatives expiry, but still).
Resistance at this zone is another clear sign of weakness.
Volatility reaches another extreme
The VIX a.k.a. the ‘fear gauge’, calculated from price premiums on 30-day S&P500 options, has logged its lowest daily Close since January 2020, or 3¾ years. It’s even lower than at the euphoric Feb and July peaks. This is insofar concerning that the equity markets have dropped considerably since late 2021, while volatility never spiked, but rather consistently dropped again to midget levels which market participants became used to as a result of a decade of central bank QE putting a constant bid under the market.
By itself this is not enough to read anything into, but within the context of AI euphoria, an extremely thin 2023 rally, extremely complacent retail traders and fund managers, a high Fed Funds rate and QT, and a heinous amount of synthetic leverage applied in 2023 hedge fund activities, we are unlikely to have seen a bottom while we might be setting ourselves for a volatility shock and deleveraging event among the likes of the 2020 selloff or the 2008 financial crisis. The VIX:
Money rotates back into energy and resource stocks
Since a few weeks ago, commodities as a group have turned up, though largely driven by the energy sector – coal, oil & gas, uranium.
Especially, coal has produced very strong leadership entering price exploration – just look at the moves in CEIX, AMR or HCC.
Oil & gas stocks are riding on the coat-tails of this move and an apparent upside reversal in oil price – there are a lot of stocks waking up in this sector, though so far moves have been limited in commitment. An upcoming opportunity might appear in the thinly-traded VIST, though group confirmation is not ideal (yet) and reward potential relatively low – I’ll probably stay away from it.
This is followed by money rotation into nuclear energy stocks, such as CCJ or LEU:
The dominance of cyclical energy stocks is characteristic of an aging market. This continues to be corroborated by money rotation into biopharma and healthcare (e.g. LLY, NVO, VRTX) and other defensive stocks (e.g. convenience stores CASY, MUSA, SFM or low-cost retailers such as TJX).
Blue-chips continue to weaken
In parallel with capital flow into energy, there has been an abandoning of many of the late AI and high-end semi stocks – AAPL is showing severe signs of distribution, semi stocks LRCX and ASML have stopped leading, and the old horse ORCL has sold heavily on its latest financials report.
Negative price action is accumulating, which was more than overdue but is still far from a level that this market would need to see to balance out the excesses of 2023 and frankly of 2020.
No follow-through buying demand in the high-quality segment of the market
The stocks holding up the best in this market, names like APPF, PSTG or IOT (among many others) have all been attracting selling when trying to move into new High price ground.
This either bad (or absence of good) price-volume action has become a widespread pattern across this chip-chop market for the better part of a few years now, and too few leading names have shown strength and resilience against prolonged weakness.
The general lack of capital flows in and systematic accumulation of risk-on equity groups is the biggest red flag of an exhausted market current observable. I may sound like a broken record, but a lack of opportunities equals a very narrow probability of being able to make consistent gains and progress in an environment like this.
Look up my previous weekly market profiles for an overview of more stocks worthwhile following, but rest assured that odds of success of speculating in strongly-trending stocks are very low right now.
And when the odds are stacked against us, it’s best to sit on our hands.
So long,
TGS