Hello friends,
A combination of a market extended on the downside, earnings reports (>1000 companies Wed-Fri), soft economic data, and the Fed quasi announcing the end of rate hikes all sent yields downwards and stocks (and bonds) upwards.
It looks like the next bounce is in the cards – no one knows how long it will last, and judging on the strength and volume of the price action so far it might linger for weeks or months. In any case, bear market rallies are the most violent of their kind, and I’ll present information which shows clearly that even if the market continues rallying in the type of ‘Santa rally’ that has already been pronounced by various pundits, it is unlikely to be anything more than a short-covering squeeze and dip-buying frenzy in value stocks, at least for now.
Take a quick peek at the S&P500 (SPX) below; multiple days of gapping up on strong volume has definitively put a short- or intermediate-term bottom to the selloff. Price is currently near the down-sloping 50DMA, which will likely represent some sort of resistance here, but has also stubbornly recovered over the long-term 200DMA, leading to the ever-looming and ever-churning media machine to declare that ‘the tides have turned‘.
The only thing that matters
Taking a step back, what we truly need to wonder is not whether the indices are bouncing violently – any student of market history will know that rallies of the last couple of days’ kind are no strangers to hostile markets.
Since indices are merely showing the average movements of stocks, in this case heavily cap-weighted, and most of the time are frankly doing a quite bad job at that, what we truly need to know is which stocks are driving this rally.
Leadership remains stagnant from the last couple of months – resource (largely coal and a few reluctant oil & gas stocks), a few biopharma stocks and a boatload of industrial laggards are leading, but lately also a few micro-cap marine shippers on likely geopolitical speculation (e.g. TN, LPG, FRO, see below) and utility stocks are attracting capital inflows … the latter classical defensive sectors.
None of these groups are truly inspiring any image of a strong, recovering market. Quite the opposite – on average, the large mounds of capital sloshing the markets remain in risk-off mode.
Most prominently, action in stocks near new High price has been bad and reluctant (e.g. DECK, DELL, PANW, APPF, VRT, ON), signaling hesitancy among large buyers to “lift the offer” and drive markets higher, or outright an attitude of unloading share blocks into liquid rallies. A lack of strong stocks in the first place is another noteworthy descriptor of this market.
All the while, if you look at what stocks have genuinely rallied in the last few days, the same rotten picture that defined the last few months is cropping up again, namely past collapsed leaders and low-quality FOMO ETFs and stocks: ARKK (up 20% in the week), AFRM (up 20% in 1 day), TTD, SQ, SHOP (up 35% in 2 days), ROKU (up >50% in 2 days), DASH, DKNG (16% in 1 day), PLTR (up 30% in 2 days), AI (13% in 1 day), WEAV, INFA, IONQ, or the decrepit UPST (12% in 1 day).
Such action, paired with the lack of a mirrored case in higher-quality stocks near new High ground (read further below), can only suggest that two things are at play – short-covering panics and dip-buying on earnings reports, both most certainly not the stuff that great new markets are made of.
All the while, and on the risk of sounding like a broken record, the higher-quality names and industries have succumbed to bad action and often outright violent selling.
Take a look at ON semiconductor (later mirrored by LSCC), which has blown up for the foreseeable future:
For the larger-cap tech stocks, of course AI sentiment has not fully abated when looking at the likes of NVDA or MSFT – but when you look closely, not all is that well. Volume is missing in rallies, price entering new Highs is faded by market participants, and earnings reactions are not always that beautiful. Just take a peek at FTNT, or at how AAPL was down up to 2.5% after it reported its financials … on the day the market gapped up >1.5%. Quite the discrepancy for one of the top names of this ludicrous 2023 rally, and in fact bad action that was masked by the massive and liquid market gap-up.
Conclusion
Though impressive price action has undoubtedly pulled a lot of unskilled and amateurish investors from the retail and the mutual fund arenas, the signs of this market developing into anything worthwhile putting money into are very slim for the moment. That of course does not mean things can change abruptly, but for now my money is aimed at other sources of income generation than speculation in stocks.
So long,
TGS