Hello friends,
The rally appears to be finally faltering. I had been talking about lower prices on the indices since the end of last year, but the extent and duration of such bear rallies often surprises in its tenacity and ability to draw in amateur speculators. Lower prices might still be in the cards, a scenario in which NASDAQ Composite undercuts its October Lows and makes a lower Low somewhere between $9300 and $9800 … but we might also just see a selloff without an undercut and a rally from there, such as in 2003. We will see, only leading stocks will tell. To show you my conviction, I’ve started a short position in AAPL and am still eyeing TSLA for the same purpose.
Yields start pricing in higher rates
The Fed has now started hardening its rhetoric again, with rate futures indicating expectations of 5.5% or higher by the end of the year. This is corroborated by a still bouncing dollar and rising yields on the longer term maturities. Especially, yields on 2-year treasuries have started moving out in earnest again, 0.4% away from surpassing the November Highs:
Market averages pull back significantly
By and large, short/term support in the indices has been undercut on all fronts: NASDAQ Composite, SP500, NYSE Composite, etc. Tuesday brought in steep selling on rising volume, and overall the amount of distribution volume on the averages has been enough to qualify as precarious at a level that is commonly preceding lower prices.
Last week’s report showed that the home-builders were first to herald short-term lower Lows, which all of the indices are now tracing out as well. As an example, the DOW transports average has come crashing down, which had advanced without confirmation from other broader indices. Confirmation in advances is not as important on the indices as it is for single stocks, yet still in environments such as the current one, it does matter.
In the very short-term, the indices might bounce for 5-10 trading days as the selling had come in at a relatively steep angle and NASDAQ and SP500 are now sitting at their 50- and 200-day moving averages. For the intermediate-term, the path of least resistance remains down for the weeks to come, and new Lows in stocks across the market are starting to outnumber new Highs again.
Remember that on Tuesday 28th there will be an MSCI quarterly review which might distort volume readings a bit.
Weak leadership selling off again
With a few exceptions such as the Financials sector (selling less, and often one of the first ones to recover to front-run the end of a recession), all the industries that had been doing quite well in the last rally are now leading the selling on the downside.
The larger semi-conductors, many of which had gapped strongly on not always good earnings reports, are now retracing their moves. ADI, ON, MCHP, MPWR, LSCC, CDNS – all in questionable digestions, and none could so far hold higher price levels, signifying absence of buying support. This is with the exception of most of the smaller unknown semis which had been behaving well, see below – however, those are not enough to signal a change in environment by themselves.
Copper, following gold and silver futures, has started descending as well. COPX, FCX are immediately following this trajectory and dropping sharply in price, while SCCO is holding stronger. But without group confirmation and in a precarious market, I wouldn’t be interested in this even if it attempted to move into higher prices from here.
Solar stocks which had shown some stronger accumulation patterns a few weeks ago have sold off and invalidated most of the advance (e.g. JKS, CSIQ). As described above, transports (e.g. ODFL, KNX) and home-builders (e.g. BLDR, LEN, PHM, DHI) sold off strongly, also among those industries that could be expected to lead and front-run an economic recovery. These were accompanied by heavy selling in the past leaders (or rather now, laggards) that had rallied strong in this bear bounce – popular names such as RBLX, W, that will now cause the bottom-fishing public heavy losses. Low-quality and thinly -traded no-earnings stocks had equally been leading somewhat, which is always a sign of a precarious market. Check out CVRX to see what can happen when the market is not willing to support weak names such as this medical equipment device producer.
All this was to be expected sooner or later, given the lack of broad and strong leadership in this rally.
The capital goods sector remains strong
Construction materials, heavy machinery and electrics manufacturers have been equally leading, but when I write ‘leading’ this is here more equal to ‘creeping up’.
Laggard stocks such as JBL, VC or WCC continue to hold up, but there is no opportunity for a growth stock speculator here. You’ll be lucky to make 25% in 6-9months, and I don’t even consider getting into a stock on the long side unless I can expect to double my money. Otherwise, why bother with the risk?
Of course, not all industrials have been able to hold their gains, adding to my hesitation to consider anything in this area. CAT, one of the early industrial leaders in this rally has given back all its gains since its questionable move out of a 1.5-year digestion back in December. Bad action that’s not getting anywhere.
Staples are not dumped yet …
…which is a sign that large funds are still hiding in these high-earnings stability foxholes. Especially food stocks (e.g. GIS, CPB, MDLZ), discount stores/low-cost retailers (e.g. KR, BJ, WMT) or cosmetics stocks (ULTA, COTY, ELF) are continuing to make new Highs or at least not sell heavily.
Growth remains a shunned area
The best stocks in this market remain a small selection of new semi-conductor stocks that have emerged in the last few weeks. Some of them are holding their recent advance nicely (e.g. ACLS, ALGM), while others are chopping about (AEHR) or are outright experiencing selling (MBLY, AMKR).
From this vantage point, I believe it’s clear that ACLS and ALGM are among the stocks that will dominate the next cycle, should they continue to hold well. AEHR has the same potential, but it’s illiquidity remains a problem in a market such as the one we’re in. However, the most liquid of them all, MBLY, has taken a quite steep nosedive towards the 50DMA. By itself, not a problem if it can hold, but this bad market might bring price down much lower, and liquid stocks are much more insightful into the health of the current market climate than small thin issues that are more easily manipulated up on limited buying.
I will here compare MBLY to the equally liquid GFS – a great digestion that resolves to the upside in a great stock can still be dragged down by the market, so be careful in MBLY. This happened to GFS four times in the last year and in the last 2 weeks again. Low-quality digestion patterns show that these stocks are crowded, making the risk of whipsaws high.
Other stocks that once showed potential are moving erratically at best and are dangerously close to hard selling at worst. WING, a fast-food retailer that had been holding quite well, tried to emerge from a low-quality digestion pattern, and immediately ran into heavy selling around its earnings report. High price has been rejected and sold into, and now its fate is largely predicated on a pendulum that is starting across the wider market to swing the other way.
SMCI has re-emerged from some bad selling over the last 3 months, and is back at new Highs on very limited volume (only 15-20% above average, indicating lack of buying interest). It had formed a jagged erratic digestion full of bad action and absence of true volume accumulation, and after forming a way-too-short platform has tried to advance upwards. While great from a wider perspective, anyone who bought this will likely get stopped out soon due to the risk involved in such scenarios.
I am happy to see SMCI re-establish itself among the stronger stocks after a great earnings report that propelled its price back up after some negative news. Now, it needs to hold and bring more supportive volume to the fore – which I don’t think it will, because if there was heavy and substantial institutional interest, it would have come in already over the last month or so. I’ll keep an eye on it.
Lay low
The market remains largely unchanged from a growth stock perspective, but a larger wave of selling has come across the indices and many industries. There is still potential for the market to re-asset itself, but such will remain futile until a strong wave of leaders finally shows up and takes the reins. There is a chance that we might bounce for a few days, but over the next few weeks and months I see prices dropping again.
In such choppy market environments, staying largely in cash and letting the carnage unfold by itself is still the best strategy for a stock speculator interested in the more mature moves. I’ll sit with my shorts until I see improvement, in whatever form it may manifest itself.
So long!