Hello friends,
Time for another review of this choppy mess. I shall focus on the US market in this report, as other westernized market vortices (Europe, Australia, Canada, Japan) seem to be currently pegged to the former.
I previously discussed a potential broadening in the market advance in the last report, however a full confirmation of a promotion of this move to the label of a ‘strong rally’ is yet to be seen – though not out of the cards.
While the large-caps (SP500) have yet again made all-time Highs on Wednesday & Thursday, the other market segments are severely lagging this dynamic – the NASDAQ Composite and -100 are still slightly below the late-Nov/early-Dec Highs, while the NYSE Composite, mid- (SP400), small- (Russell 2000) and micro- (IWC) caps are yet merely registering a couple-% bounce of the lows. The IWC yet again dipped briefly back into bear market territory a week ago.
While no indices confirmed the retest of the old Highs and setting new Highs on SP500 yet, almost all indices made intermediate-term lower Lows in mid-January, typically a sign of at least an incoming secondary market correction.
Despite the happiness that long-term holders will experience when looking at their SP500 and NASDAQ ETF holdings, a degree of caution is advised. I’m not only talking about the above-mentioned divergence, but also the degree of concentration and lopsidedness the market advance is showing. In 2023 and 2024, 71% and 72% of all SP500 stocks have been lagging the index itself. This is also seen in an unusual performance gap between cap-weighted and equal-weighted SP500, the latter outperforming the former by >2.5% per year overe the last few years (see chart below).
This market is clearly driven by a very slim selection of AI-hyped mega-caps, while the rest of the market flounders. There are other signs of a late-stage market (e.g. a re-inverting yield curve, exuberance in futures and options markets, FOMO stocks, etc.), but this does not suggest that the rally is at an end yet. Measures of overextension are accumulating and magnifying, but they can stay so for a long time. However, observed dynamics raise the risk of being invested in this market without risk control (speaking to you, ‘long-term’ ETF-, blue-chip and Microsoft/Netflix/Apple/Nvidia/… investors!)
Other market internals remain weak. While the SP500 is back to all-time Highs, there is only about a third as much stocks making new 52-week Highs – splitting these up by exchange reveals that NYSE-type issues are showing a higher number of registered new Highs than new Lows, but the same divergence is appreciable, while NASDAQ-type small growth issues have been and remain water-logged.
Equally, the old NASDAQ vs NYSE A/D-line divergence is fully intact, with NASDAQ issues having made a new Low in January.
Leading stocks march on swampy ground
Currently, there is a basked of 13 names that I find have the strong leadership potential that can propel markets higher. These names are VRT, RDDT, AS, RBRK, RKLB, ADMA, VST, TLN, CAVA, ALAB, SN, APP, and PLTR.
Once you look closely, you will see that their trading character is typically erratic and their price levels extended. Advances don’t find well-balanced cooling periods of supply and demand, with largely news-driven knee-jerk up-moves giving them more upside. Eventual significant pullbacks end up not finding sufficient buying support – note that this list already has a positive selection bias, as the floundering stocks I had been watching the last few months have already been eliminated.
Chop remains la mode du jour. Potential setups are forming in AS, RBRK, APP or PLTR. Whether these will work is another question, as lately a lot have failed. Demand and supply dynamics are out of whack, hence the chop.
Other interesting ideas I find are the Canadian oil stock TNZ, the Australian mining dwarf BC8, or medical stocks OCC and IMR. Careful with the latter low-priced stocks though, volatility is heightened which needs to be factored into our exposure.
Japanese 2901.T looked promising until a few weeks ago, when an immaculate uptrend and digestion have started looking increasingly weak and devoid of buying interest. Other potential setups are forming at 4784, 6632, 5535, 6834 or 5805. No rocket ships by a long shot, and embedded in an equally choppy environment.
As for the last few months, trading the strongest stocks of the market remains difficult, owing to unexpected volatility and disturbed supply/demand dynamics. Perhaps the incoming earnings season, following the inauguration of the new US president, can bring a change to the character of this market. Until then, probing and sequential exposure only after recognizing traction remains the prime command.
So long,
TGS