Hello friends,
The major positive development this week has been a confirmation of the NASDAQ Composite and SP500 up-trends by the Russell 2000 (small- & midcaps), SP400 (mid-caps) and IWC (microcaps), each surpassing their old Highs from a few months back and attempting a breakout of their trading ranges and start of a new up-trend.
Technically, this is not the strongest confirmation yet as SP500 & NASDAQ are making all-time new highs while mentioned averages are only making locally new Highs, and it is only tentatively so due to the minimal threshold being passed over the old Highs – this will proceed to either become a stronger or weaker indication the more time passes, depending on whether price can hold above those old Highs and trend higher.
Still, it is a relatively strong development, technically broadening the market advance and a signal that should be heeded, though still carefully so.
Overall, the market continues to be led by a narrow set of AI-exposed tech mega-caps and a whole slew of industrials (capital goods, construction stocks, etc) & defensive biotech/healthcare equities, pushing the NYSE A/D line continuously higher while NASDAQ’s A/D (younger growth stocks) continues to trend down substantially. This is also appreciable in the NHNL gauge split by exchanges, showing that the curent market advance is largely driven by NYSE-type “sluggard” stocks while younger innovative stocks lag. On top, fewer stocks are responsible for the most recent new Highs on the indices (bearish divergence).
What’s up with the leaders?
Last Friday’s advance, though displaying impressive price action on many charts, was severely anemic in volume and potentially largely tied to a knee-jerk reaction following the latest inflation report. Though the potential broadening of participation is good news, we need to see how strong this market really is by looking at what’s driving it.
The overall impression is that, although there are a couple of great stocks leading the market, their price action is highly erratic and untypical of a strong market advance. In any case, risk management remains difficult to impossible in most of them, dampening the euphoria that the big-tech names and popular indices (NASDAQ, SP500) are pushing on the smart speculator.
Take CELH for example – a jagged/erratic late-stage digestion followed by a strong move into new Highs. Though a great move, it was not a worthwhile risk/reward play, judging on the quality of the digestion. CELH might indeed stage a climax run similar to SMCI now (a very similar chart), however the risks far outweigh anything to be gained from this rally that has been grinding up since 2020 – the ‘meat’ of the move, its smooth ride, is long over.
Recently, an array of stocks that are and were leading have been whipsawing heavily, e.g. FN, PANW, DV, BIRK – as much as price action is strong in the blue-chip sluggards such as NVDA, AMD and the likes, the stocks were true money could be made remains problematic and risk management inhibited. Money is more and more crowding in the obvious blue-chips, while volatility is problematic in the high-quality equity space.
Two relatively newer ideas are DUOL and IOT. DUOL might set up a nice pivot point soon, and for the moment we can do nothing more than observe if such will take place. The digestion however is unnecessarily deep, showing systematic selling while the market was rallying. IOT is equally producing some sort of digestion, and the stock is of high quality – but price action is not quieting down, volume is not dissipating, the advance slightly wedging as nearing old Highs. The most impactful criticism at this point is however (for this stock and others, including DUOL) – if it is such a great stock, why hasn’t it led all the way already, sticking up 200-300% in mid-air and forming a nice low-risk entry point? Why is it held back byt reluctant buying or outright selling, while the indices are sprinting ahead? A leader leads by definition, and I am not inclined to give these stocks a chance based on latter alone.
Meanwhile, strong and sometimes exuberant price action is found in the large-cap tech sluggers: DELL, AMD, NVDA, NTAP, PSTG, and many others, paired with weak chart character and any strength almost exclusively tied to earnings reports somehow mentioning the word ‘AI’.
The bull/bear ratio of newsletter advisors has risen to >3.5x, all together suggesting money rotating into defensive late-cycle areas and blue-chip AI laggards with high media exposure. The trend is up and will most likey remain so, but price action is choppy across the board, inhibiting any meaningful speculative operation in individual stocks. An environment that is definitly tradeable should great opportunities show up, but also not what I would start salivating over. In any case, the ‘great opportunities’ part is still lacking for me.
So long,
TGS