Hello friends,
Some of the more widely followed averages (e.g. the SP500 or the Dow) have broken out of their July-September consolidation zone and are continuing to trend upwards. There has been a clear rotation in the markets, and while big tech stocks and industrials & defensives had been leading up until a few months ago, the Magnificent 7 darlings and other tech stocks have started to lag lately.
This is appreciable when looking at stronger vs. weaker group averages – the RSP (equal-weight SP500), NYSE Composite (NYA; largely laggard & ‘traditional’ industries including financials, consumer goods, services, blue-chips) and the Dow Industrials (as good as obsolete index of 30 large-cap industrials) are head-to-head at new price Highs, while the NASDAQ Composite (COMP; tech, growth, smaller-cap stocks), its smaller brother ND100, the Russel 2000 (small-caps) and microcaps (e.g. IWC) are all still stuck in choppy sideways moves.
The dynamic of ‘old-world’ NYSE-type stocks leading vs. small-cap & growth lagging is equally summarized in the picture given by advance/decline lines (simplified: a sum of up- minus down-trending issues), plotted for each exchange. These are showing a blasting divergence since October 2022, emphasizing why trading growth has been somewhat of a choppy affair since the 2021 top:
We’re entering a historically volatile time and might not see committed improvement or degradation of market internals until the US election in November, however over the last few days there’s been an inkling of improving participation in the rally.
If you look closely at the Russell 2000 and the microcap ETF ‘IWC’, you can see that small-caps are at the cusp of attempting to start a new group up-trend (which would be a godsend for this market), while the IWC has yesterday tried to breach out of its bear market territory (-20% off the 2021 Highs). These could be the first steps of a larger move, however we have to be extremely careful not to jump the gun – both averages have acted similarly a few months back, just to get jolted back down almost immediately.
International markets mostly choppy
In similar fashion, European stocks (e.g. Stoxx 600, AEX or N100 blue-chips) have been stuck in choppy sideways ranges, undergoing secondary corrections. There are a couple of stronger indices, notably the German DAX, however participation is equally thin here. Other indices such as the French CAC, Polish WIG20 or the Danish OMXC20 are behaving very weak, which is also appreciable in the collapse or at least notable pullback of many leading stocks, including GUBRA, ZEAL, RHM etc. Current leaders are Swedish HOFI, Swiss RSGN or the Italian RACE, however I am not inclined to participate heavily beyond default probing positions.
Australia (along NZ) and Canada are performing a bit better, with the ASX200 or the TSX Composite trending well upwards, which is however tracing out the same causative factors underlying the NYSE Comp rally, along the fact that these markets are dominated by cyclicals and mining issues rallying along the latest explosion of Gold futures. There are a ton of small illiquid issues rallying (e.g. TNZ.CA).
Japan’s Nikkei 225 and TOPIX are stuck in a wild trading range that started with the unravelling of the Yen carry trade, and the averages are now in limbo of indecision regarding future fiscal and monetary policy in Japan. The fact remains that leading stocks are few and rare, and I believe there is not much significant money to be made traversing the country of the rising sun anymore, at least for the near future.
China received a stimulus ‘bazooka’ which led to both a massive short-squeeze and panic buying largely by foreigners, prompting a >35% rally on the SSE Composite over just a bit more than a week – again, strong leading stocks are absent so far, which I interpret that this rally so far is not much more than ‘hot air’ ETF money pumping and short covering. We’ll see how things improve, including the Hong Kong market, but for now there is nothing truly actionable (2 issues I like are 9899.HK and 9992.HK, but it’s too early to tell whether they’ll be tradable soon).
US markets trendy but choppy
With the xenos out of the way, let’s look at the US. Leading groups are, as indicated above, financials (REITs, insurances, some banks), industrials (electronics, metals, machinery), consumer services, Utilities (especially electric) and healthcare (pharma, biotech).
Though there are some very nice names available (e.g. ZETA, ADMA, INSM, RNA, VST, TLN), it’s important that volatility is high, constructive digestions have a hard time forming, and shakeouts abound. Take a look at ADMA below, which is only buyable on earnings haps and sold off heavily last Thursday on some internal quarrels. Other names such as RNA are wedging around in choppy ranges.
Or take a look at TLN (below), a strong utility stock which however will give you a hard time ever getting in on low-risk entry points. Other electric utilities rather gap violently on news-driven knee-jerk moves than trade smoothly; e.g. NRG made a move out of a whacky digestion, and now has a high chance of stalling where it is now right into its upcoming ‘day of judgment’ earnings report – likely a source of more whipsawing.
Strong chop is omnipresent, discipline is rewarded not necessarily by large profits but by avoiding death by a thousand cuts, and lots of patience is required. There is money to be made, but it’s not easy money (as e.g. in 2023-24 in Japan or 2020 in the US).
This environment has been persisting for a number of years now – Fed rate cuts so far were not able to derail the market in a sell-the-news fashion, so the next big catalyzers for equities as a group will be the outcome of the US election in about 3 weeks and the degree of basis points cut from the Fed Funds rate at the next FOMC meeting. Perhaps these will bring a long-needed air of change, but I’m not overly positive that will materialize – in any case, continue trading but don’t go over board with exposure. Markets are selective and concentrated, and risk is high.
So long,
TGS