I don’t want to start with “I told you so” … but then, I did. In my opinion, the 4th leg down on the indices is on. Institutional distribution of stock has expanded, clocking 8 trading sessions within the last 5 weeks.
This happened not only on Thursday’s and Friday’s steep-angle selloffs, but notably already on the volatility spike on Tuesday after the CPI report and its massive-volume price reversal occurred. The latter was described by many popular news outlets as rising prices and positive response allowing stocks to “rally into year end“. I have discussed here why the rising closing price that day was a bearish sign.
General market remains choppy, market remains complacent
The NASDAQ cracked below its psychologically critical 50DMA on strong volume, and its Advance/Decline line has made a lower Low in its downtrend. When this cumulative metric up-vs-down moving issues precedes lower prices on the indices in a negative divergence, a walk in the park for risk-on equities should not be expected. On top, we are already seeing more than 5 times the amount of stocks making a yearly Low than those marching into new High-ground.
Amateur speculators have been and are still piling money into passive-investing instruments in 2022, averaging down into a precariously falling market. Now we are coming into the Christmas holidays, were liquidity always dries up. This does not necessarily mean radically lower prices, although nothing is a given at the moment. Due to the sharp selloff last week the market is slightly oversold in the very short-term trend, and thus may stage a sideways move over the festive period before volatility picks up again in Q1 2023.
How exactly the next few weeks will spin out though is completely irrelevant, and neither do I don’t intend to predict the details, nor do I need to know them. The fact remains that the long-term trend and the line of least resistance is decidedly down. The odds are strongly stacked against seeing uptrending markets in the next few weeks, not only from what I mentioned above but more so because of the abysmal leadership profile of this market. Thus I know that there is nothing actionable for me right now.
A recent uptick in the put-to-call ratio I’ve observed could signal rising fear in the markets, but it could also just stem from the volatility surrounding the CPI report and Wed’s FOMC conference. By itself, it does not mean much, and other approaches to gauge sentiment extremes are still not showing any satisfactory changes towards what I expect near a market bottom. But it’s a start, and could be the first inkling of finally something starting to brew … we will see.
Friday’s triple witching (simultaneous expiry of three types of options contracts, this time totaling about 4 trillion USD) has skewed any attempt at looking at volume on that day, but we can look at the day’s prior and general price action to gain an insight.
New Highs are sold into
The laggard DOW Industrials that had been leading until recently have shown heavy selling and similar reversals as seen on the indices. Throw a glance at a weekly chart of IBM, Amgen (AMGN) or the golden arches (MCD) and marvel at last week’s reversals on volume.
There are reversals, gaps, and selloffs observable all across the stock market. General action resembles a clearly continued bearish stage, and not just since last week.
Technical positions of recently-strong stocks weaken more
Existing digestion patterns, some of which were relatively constructive, are falling apart all over the place. ON semiconductor had shown strong relative strength throughout the whole bear market, and was close to finishing of a relatively neat digestion which was however lacking significant volume signatures (a subtle but important sign). Now the platform that had formed is falling apart – more of a diving platform than a rocket ship one.
Similar is happening in Amkor Tech (AMKR) and Interactive Brokers (IBKR) – both not my favorite selections, but in a good market their patterns would hold.
More alarmingly, recent leaders from the medical tech arena Shockwave (SWAV) and Lantheus (LNTH) have by now fully blown apart are but shadows of their recent strength. Very bad omen, but by now not ‘new’ news anymore to anyone watching.
As alluded to over the last few weeks, many wedge patterns and faulty digestions attempted moves to start new uptrends. None attracted significant buying demand, and all failed miserably so far – or at least have been stopped dead in their tracks waiting for Damocles’ sword to fall.
There were a few lower-quality names, including ACLS, ARRY or ASO showing this behavior. However, most impactful this last week was the failure of a move in Globalfoundries (GFS) stock. Tuesdays reversal and the steep-angle selloff is a harshly bearish sign for growth in this monster showing >1000% earnings growth last quarter YOY. There was an early entry at $61.40 which I avoided due to the bad market – even that one is under water now.
Negative action was corroborated by ANET’s shakeout and volatility that is almost brutal for such a name.
Even the last few standing commodities were hit – steel leader STLD, and gold stocks FNV and GFI sold off hard, the latter two defying the brief uptrend that gold’s is currently attempting off the Lows. With the dollar due for a bound, we will see how gold spot fares – but leaders breaking is never a good sign.
Some improvement in the housing sector
On the upside and quite curiously, a few homebuilders have shown some strength recently. PHM, LEN and DHI haven not sold off last week, and are in fact holding up nicely. LEN’s management guided for a national slowdown in construction, but also signaled to reduce prices on buyers. Lagging in the selloff, or discounting future easing? Last men standing or first men up? It does not matter as of yet, I will keep my eyes peeled.
The IPO market is frozen up, but there are interesting developments
The other noteworthy development from last week, or rather the last few weeks, is Mobileye Global (MBLY). A recent IPO, it is already trading almost 100M$/day, and shows spotty but recently growing earnings. They manufacture system-on-a-chip products for autonomous vehicles and driver assistance solutions. I will keep my eye on this as well, as the relative strength is eye-catching, and not many companies can both raise money such an economic and market environment AND their stock hold up. But the last word has not been said on this, so further monitoring and patience will be key to see whether this will provide an opportunity for when the market turns sustainably.
Complacency still is too high
I believe we will need to see some more negativity into people’s actions, not into their words. The old chugger AAPL may need to draw the indices down significantly and excess hope with it. I think Apple matters a lot, not because of personal reasons, but because so many other people still consider it a safe bet. People that need to be flushed out, dumping shares in disgust as they see losses piling up.
I expect somewhat of a choppy sideways move into the end of December due to the holidays, and definitively more downside going into Q1 2023.
Be patient on the sidelines
As always, I might be wrong about the extent or the duration of a move, but I don’t really care. Successful speculation is not about predicting anything with accuracy. It is about the ability to balance probabilities, keep up emotional discipline, be exceptionally austere in bad times, and selectively aggressive in good ones.
The Chinese symbol for the word ‘crisis’ is made up of the two characters for ‘danger’ and ‘opportunity’. I’m sure you’ve read about this before, and it means that every misfortune can bring a seizable opportunity with it. Baron Rothschild famously said “Buy when there is blood on the streets.” With all due respect, I would adjust that to “Buy when flowers start growing out of the blood on the streets.”
With that adjustment I want to stress that buying into dropping prices is an abnormally dangerous activity; I’d rather buy into prices that have dropped for a while and are then starting to rise again with a critical mass of capital behind it.
As sure as the sun rises every day, an opportunity will arise out of the misfortune that has currently afflicted the markets. Because, after every downtrend comes an uptrend. I don’t pretend to know, nor do I intend to predict when that will be. But I do know that I will know when that time comes, and I will capitalize on it then. And I will resist to dabble in something different until then, because that will only cause confusion in my mind and with my strategy. The best speculators in the world have mental clarity.
So much for this week – see you guys next time ’round.