Hello friends,
After the NASDAQ Composite has retraced roughly 9% of its rally since July 19th, it is technically in a secondary correction. As seen before, the blatant absence of quality leading stocks amongst other indications we’ll briefly discuss suggests that not much has changed since last week.
Effectively, we’ve just witnessed another week that can only be described as sellers returning to the market, showing lack of support at the 50DMA (NASDAQ, S&P 500).
While strong selling was not that apparent both in volume and %-extent on the popular indices, it was much more pronounced in the risk-on sphere, as for example reflected by the IWM for the Russell 2000 (mid- & small-caps), the SPSM ETF (small-caps), or the IWC ETF (micro-caps):
As before, residual bull sentiment in the mega-8-caps masks a broader dominance of selling under the hood of the market.
Oil turns up, following a broader commodity move
As indicated last week, an important average price gauge of the commodity market has turned up, and over the last few days oil seems to be pushing ahead again. Technically, it is still in a long-term downtrend, but it is in the process of making higher price Highs in the intermediate term which could over the next few months potentially turn to a renewed move in the O&G sector:
Oil & Gas (OG&) stocks heading up would come in line with a starting move in other energy and resource stocks, such as coal (e.g. CEIX, AMR). So far, there is some confirmation from O&G stocks, although price-volume action is nowhere extraordinary.
Petroleum refiners PBF & MPC have made a good move into new High price on rising volume, though price action is erratic. Other sister stocks though are displaying limited follow-through buying and even reversals – take a peek at SLB, VAL, NE or PARR).
Even in the leading groups, going long remains dangerous – money can be made, but in this choppy market most likely only on the odd swings rather than longer moves.
Growth leadership remains under attack
Last week I penned a brief article into the recent ascent of capital goods/-equipment manufacturers in the tech & telecom space, indicating typical rotation of money into a late-stage group of cyclicals.
Many of the mentioned leading stocks, such as SMCI, ACLS, EXTR, PSTG, ANET are showing erratic and questionable price action, often paired with a reluctance to follow through on the upside – again, typical of a chop’n’slop market.
Look for example at the hefty & asymmetric selling that has befallen SMCI or EXTR:
Or look at IOT & PSTG’s behavior at new all-time price Highs – do they attract large money inflows right here? Are there institutional money managers ‘lifting the offer’ at that point (buying at any price)? It sure doesn’t seem so:
Blowups in some of their sister stocks (e.g. PLAB, AMKR) occurred last week, continuing a slew of topping signs that could be observed across the market over the last few months:
As an anecdote, even the ‘all-eyez-on-me’ eponymous AI appears to be finally rolling over, with first FOMO retailers throwing in the towel. This is following earlier collapses in idiotic rallies of other AI stocks such as OPRA or SYM. However, witnessing last week’s gap of the old slug DELL on a mere mention of artificial intelligence leads me to believe the euphoria is far from over, and AI might still re-ignite.
The stocks of highest quality at this point are clearly VRT and CELH. Monitor them closely, but they are both far from actionable and extended. They might become some of the leaders of the next cycle, although chances are high that the great deluge will flush these out as well – it’s too early to tell, and all we can do at this point is watch.
Conclusion
The market remains choppy & extremely thin, and although the first cracks are forming in the AI euphoria (tech companies are unable to show the eagerly-discounted earnings growth, are admitting it will not materialize until years from now, or have no monetization plan), dip-buying mutual funds and retailers continue to put a constant bid under stocks of companies announcing any news related to AI.
That means that there is no substrate for a sustainable rally, but there is also still enough emotional momentum and lack of opposing catalyzers present to truly drive the manic ghost out of the machine. Though money can be made in cyclicals, risk remains high and reward potential low.
Tread carefully.