Hi friends,
A short week has passed with few notable action. Blue chips have pulled back slightly while money has rotated into cyclicals and “value” laggards in the mid-/small-/microcap segments of the market. When the latter rally it’s usually a good sign – but it always has to be taken with a grain of salt, as ultimately again the individual stocks actually rallying have more to say than just the averages.
And there’s still not much to see there.
S&P500 & NASDAQ Composite are near 2023 Highs, which they have been for some weeks now. As reported previously, the a number of negative divergences have formed to the July top near which the indices are now hovering – there are much fewer stocks in free price exploration driving the rally, A/D lines are lower, etc.
Critically, the VIX has now even surpassed its July Lows and sits around $12.3 – the lowest since January 2020, and it is hard to emphasize how dangerous such volatility contractions can be when markets are thin (such as now) and some or other catalyzer leads to a volatility expansion.
Complacency at its best.
Notably, markets sill remain to be propped up, even temporarily, by AI news – the total-FOMO AI robot stock SYM exploded 60% in a handful of days on earnings in a late-stage erratic and faulty digestion, and the mega-cap titans GOOGL and AMD were lifted on some of their own news last week. The AI bubble still reigns supreme with many, though fierceness definitively has subsided. Still, not great signs for such a complacent market, with the Roundhill Meme ETF up over 35% in a few weeks on volume and price action mirroring the July top.
Indices, and pretty much the whole market, are now heavily extended after a fierce (at least on paper) November rally. The market is top-heavy and in need of a correction – depending how that will play out, we can try to see where we’re going.
However, we might also see a melt-up – wouldn’t be too much expect at this point. It doesn’t really matter in any case – indices near new Highs shouldn’t mean anything to you. Can you see strong stocks leading, sprinting ahead with impeccable price/volume action?
What’s leading this market are the worst of laggards – value and various cyclicals concentrated in the areas of heavy industrials and capital goods, construction equipment and materials, resource stocks, and defensives from the insurance and biopharma area. Nothing to get excited about from any perspective.
A couple of stocks pique my interest – VRT, IOT, DUOL, and recently ARM that moved above a critical pivot point last Friday. The odds are against the latter in this market, and I did not participate – if it’s so great, it will have to prove itself to me first.
Though there are some silver linings, even many of the fake bear market rallies in 2022 had more pronounced and stronger leadership than this ludicrous rally that appears so far to have been driven by renewed central bank liquidity, stock buybacks, short squeezes and dip-buying.
In short, the evidence indicates no need for me to risk anything right now. Money remains to be better off chasing other adventures at the moment, if not staying in cash.
So long,
TGS