Hello friends,
Another boring week of sideways or creeping action on the indices lies behind us. The market is still dominated by large-cap tech stocks propelling the NASDAQ and SPX begrudgingly up, while the wider breadth (for example “RUT” for small/mid-caps) is continuing to drift in risk-off mode:
Markets remain thin
Looking at the chart for NASDAQ, you can see that speculators were avidly awaiting price to cross above the February Highs at about $12,300, which has happened but not in a way that is sustainable so far. Volume was low, and no single other index (whether SP400, -500, -600, any of the Dow indices, NYSE, etc.) has confirmed this move over the threshold. Likely a fake-out engineered to have a lot of amateurs and self-proclaimed ‘expert’ talking heads in the financial media declare the next up-leg to draw in liquidity and sell into it. As I discussed on numerous occasions, at the moment NASDAQ is almost exclusively driven by money rotation into (at least so perceived) strong-balance sheet Tech darlings FAANGM and other old-world names, e.g. Oracle (ORCL).
Those who say that we’re in a new bull trend don’t understand that the stock market is a speculative asset – a new up-trend is only confirmed by one thing, and that is heavy speculation in a wave of strongly trending stocks – which is nowhere to be seen. This is not a new up-trend, but a shredding machine for your hard-earned capital.
Index action fraught with selling and lack of buying
JP Morgan famously said that the only thing sure about the stock market is that “it will fluctuate”. Well, fluctuating it does. Indices and most stocks have been meandering in ranges, neither moving up significantly nor giving back too much ground. Such a trend-less environment is dangerous for speculation other than perhaps short-term swing-trading or selling options (which I don’t recommend for the amateur).
Even worse, despite the undulating upwards creep of NASDAQ and SPX, the averages have actually been silently shouting at us that distribution of stock is still rampant under the hood. As of Friday, 6 out of the previous 25 trading sessions were biased towards selling, and quite heavy one at times for that matter. Price is stalling over the last few days. I’m really curious how high this late Big Tech fanboy rally in AAPL, NVDA, MSFT, GOOGL etc. can last. Probably longer than I care to say would be expectable.
Large capital in risk-off mode
Institutional investor money has continued to rotate into safe havens and recession plays. See here the industries of the stocks with highest relative strength or showing the best performance profits (most buyers/least sellers):
… and the shiny sounding “Technology Services” part is filled with the old Big Tech “Safe Bets” and high earnings-stability electronics stocks.
Insurances, car parts, biopharma, drug stores & generics manufacturers, consumers staples (specifically preserved food, cosmetics,…) perform well relatively to their own history, suggesting strong capital inflow of mutual funds and others that are mandated to stay invested in any market environment.
And where do the FOMO speculators go? Well, no-earnings biotech of course. If healthcare leads, you can be sure that many people will start to pile into these microcaps that are really nothing but laboratories running a massive loss and whose livelihood has the Damocles sword of the FDA hanging over their stock. The latter can literally crash a stock 50-80% overnight. Not a good reward/risk situation if you ask me.
Another group that has been performing well are HVAC manufacturers and dealers. Another boring high-earnings stability industry, or a unique bounce due to ESG-imposed building renovations across the country. I don’t know, I don’t care. Nothing of interest in either case.
What’s in vogue?
This market is still on the verges of over-complacency – the VIX hovers near >1-year Lows, newsletter writers are promising heaven and earth, financial media are touting “the next big opportunity”, and NASDAQ had, at its lowest point in October, only declined about -35% from the top. Remarkably unremarkable, keeping in mind that we’re in the tightest monetary environment since a very long time, the Fed put is gone, almost all previous stock leaders have collapsed, none are taking over their place, there’s a financial solvency crisis in full bloom, and we’ve just passed a reckless market environment among the likes of the dot-com bubble. Even then, NASDAQ declined over 70%, more than double of what we’ve seen so far.
There’s not really any fear coming in – I’m aware that contrarian expectations of “the market hasn’t bottomed yet because the VIX is not at XX” are amateurish in their own regard, but excessive pendulum swings in the one direction (i.e. the liquidity bonfire market rally of 2020/21, essentially the climax of the last decade secular bull) need to be corrected by swings in the other direction. This has simply not happened yet, and there are no stocks to show for either.
Instead, people have been busy shoving large amounts of money into the past leading stocks that are deep underwater – UPST, PLTR, CVNA, UBER, AFRM, FAANGM stocks, etc. When people expect that the next up-trend will be a continuation of the last one, tears are sure to flow at some point.
Stop forcing trades in this market
On average, institutional holders are using stock price advancing to new High ground to take profits and reduce risk, i.e. there is no substantial firepower enabling the continuation of trends. This is the main reason for this choppy environment.
This is both true for true leading stocks and the laggards of this market. Regarding the latter, just have a look at AXON. Once a 1-in-10,000 stock, nowadays it is a low-confidence bet of those that can’t sit on their hands. It’s what you could call a “leading laggard” if you wanted, but it has again ceased being one a few days ago, as liquidity around the earnings report was used to dump positions. I’ve read a litany of social media warriors, even some fund managers, promising that this is their new favorite bet (because, really, that’s what stocks are) – of course, AXON rolled over hard, being crowded even for such an old dog.
Volatility in this market remains insane and general price action malign, despite the relative quietude of the averages. This was also appreciable in the admittedly more interesting (ex-)leaders, on which all eyes of the market seem to rest – LNTH, CELH, SWAV, FSLR.
FSLR gapped down hard on it’s financials report a couple of weeks ago, only to explode up again on an acquisition of a Swedish thin-film solar manufacturer and among wider sentiment shift in the industry due to treasury announcements regarding tax credits for panels. On the one hand this is great for the stock, on the other hand volatility is so extreme that one cannot sit in such a stock while also trying to manage risk properly.
LNTH and SWAV are in the (attempted) process of continuing their up-trends. They are trying to emerge from similar digestion patterns, but so far they have not resolved the way one would expect – there is a general lack of conviction and buying power. As LNTH and SWAV are equally crowded stocks due to the general lack of tradeable ideas in this market, I bet a whole horde of people will be stuck in both while now there appears to be a lack of follow-through buying demand. Specifically, the absence of SWAV exploding out of the small platform pattern visible on the right on massive volume on the day of the blow-out earnings report is a red flag. There is simply no risk appetite with the large speculators.
In a good market, this could still resolve well, and even now it may – but the odds are low. A single spell of market weakness, and these moves will fail quickly.
Generally, earnings reactions were not benign over the last few weeks, looking at now-crashed leaders such as MBLY, PI or ANET. CELH was an exception catapulting up and now holding these price levels. I have a similar opinion of this stock – it had a great run in 2020/21, but now is overcrowded, obvious and well-player. Of course, never say never, and it might start leading again – but we’re talking about odds here, and they are low of CELH doing so.
In any case, 2-3 stocks near their high price is not a reason to get the champagne (or the cheque-book) out in anticipation of a great market turn.
Concluding
Nothing has changed from the weeks and really months prior, and if anything, things have gotten worse. Speculators active in this market are now standing on ice that’s so thin that you can see the riverbed below. There are as good as no signs that we are about to enter a better environment very soon, and most people will learn the hard way what “death by a thousand cuts” really means.
Markets either scare you out or wear you out. Actually the often wear out most people and then scare out a good remaining portion. We’re definitely in a wearing-out part, don’t let it get to you.
Manage risk, stay sane!