Hi friends,
The larger market drift from January on has almost exclusively been driven by a small set of tech mega-caps (the mega-8). I’ve discussed the precariousness of such a thin and concentrated market ad nauseam, but the crux remains that a strong market is a broad market – not just by certain classical metrics of breadth (stocks above a moving average, stocks making new highs, A/D lines) but more so the fact that a healthy market shows strong price/volume action in indices and various high-quality leading stocks across multiple industries & sectors.
So far, none of the above has taken place, despite the financial media screaming from the rooftops that a new bull market has arrived.
Looking at the ‘All-Eyez-On-Me’ index, the NASDAQ Composite, the below chart indicates a substantial increase in distribution and lack of accumulation of over the last few weeks, and really, months. Distribution can come along rising price, and is a signal to be heeded.
The market is led on the one hand by stale old names, sluggish cyclicals and “value” plays, and on the other hand these 8 tech mega-caps, which by virtue of their exorbitant market caps are biasing the index rallies to the upside. If you were to look at classical breadth metrics, e.g. the A/D line, you could quickly pick out this dynamic – growth equities have been in a long-term bear market since the “meme” top in early 2021, all while cyclicals (largely enriching the NYSE) have been leading reluctantly.
This signals to me more classical money rotation of funds into risk-off equities, with an over-crowded status of the few AI-plays (META, MSFT, GOOGL, AAPL, TSLA, AVGO, NVDA, etc) making the rally prone to liquidity shocks, which for example the latest announcements of the BoJ plus long-end yields moving out plus the dollar spiking (on which virtually everyone was bearish), negative earnings reactions/guidance (see below), Fitch’s downgrading (which in August 2011 led to a mini-crash), or a combination of multiple factos could be – only the market’s reaction going forward will tell.
The S&P500’s >20% rally this year has almost exclusively been driven by 8 stocks, while the rest 495 companies of the index (yes, the SP500 has actually 503 holdings) are more or less flat. This shall be no real issue to a skilled stock picker, if the few stocks that lead a market rally may offer great opportunities for profit. Plot twist – this of course was not the case.
US markets didn’t take the last week’s events easy, and neither did international markets. The US, European and most Asian markets (including Japan and Taiwan) suffered from some major distribution, which may or may not signal something larger at hand.
Right now, ETFs and indices that were on the brink of confirming the SP500 and NASDAQ rally (many months too late, of course), e.g. the NYSE Composite, the Russell 2000 Growth segment (IWO), the mid-cap SP400, etc., are sputtering around their reversal points (e.g. below red line on IWO chart). This by itself does not necessarily mean anything negative at this point, but in context with the below it shines a rather negative light on the continuing rally.
Cyclicals unchallenged
Apart from the AI hype-ridden low-quality stocks and the mega-8, leadership of this market remains with uninspiring names. ‘Dow’-typical industries (industrials, machinery, capital goods, electronics, transports) which are largely reflective of a late-stage bull market environment, remain strong, even often into earnings reports.
Not much to be said here – if you’re a large mutual fund and you have to be in the market by mandate, sure – industrials will look really mouth-watering right now. Just keep in mind that most names are equally as extended as the popular indices. And extended means that the risk of pullback and whipsaws is rising by the day.
Earnings, earnings, earnings
The buzz-word since the dot-com bubble, earnings make money managers and retail investors foam at the mouth. More important that the numbers themselves, of course, is the reaction of market participants to them.
While few true high-quality market leaders have shown their hand, the health of this precarious rally may well be best analyzed by looking at the few stocks that are leading it and are attracting the largest capital inflows.
Generally, there were some favorable reactions in the semi-conductor space (e.g. LRCX) that lifted the sector a bit after Taiwan Semi’s lowered guidance led to somewhat of an airpocket a few weeks back. But even here, there are cracks forming – distribution can be found with rising price, and forming trends are by and large without any favorable volume signatures (e.g. ON)
But that’s pretty much were the good news stop. The over-crowded blue-chips were hit hard the last few days.
MSFT gapped down on earnings.
AMD’s report led to a strong price reversal.
AAPL gapped down and sold off hard last Friday, displaying a change of character, selling hard through its up-trend line and the 50DMA.
The cybersecurity darling FTNT gaps down 25%, mimmicked by PANW, which previously moved over a small pivot point without any noteworthy volume. These were two of the leading tech names as well, though showing rather reluctant price action.
AMZN, though gapping up, sells hard intra-day (and is the blue-chip mega-8 that is buried the most under overhead selling supply).
Stocks are rejecting new price Highs, and liquidity is used for the sale of large share blocks. AAPL’s reaction is particularly problematic, as it is the heaviest weight in all the hype popular indices of SPX, NASDAQ Comp and NASDAQ-100.
The new paradigm
When random people that have no connection to the stock market are telling you that buying AI stocks might be a good idea right now, it’s probably a sign things have become somewhat overheated. Similarly, a lot of hype has gone into old stocks from the last cycle that have been revived and pushed by retailers on social media on some or other AI element to their companies, many of which we’ll look at below.
“This time it’s different” will always be “famous last words”, and the sheer number of blow-ups in the last few days are testament to that – because, the negative events were not limited to the blue-chips.
I’ll rattle off a list of the accruing negative price action in relevant stocks that were leading (or perceived to do so by the masses) and their charts, and you can form your own opinion. Let’s kick it off:
TMDX – a better-quality leader, showing bad price action for months – gaps down 10%.
ALGM, similarly, sells off 20%.
RMBS, again a similar stock, fails from a relatively constructive digestion, and rolls over hard.
ACLS, one of the few strong leaders with good price action left, rejects moving into new price Highs for the second time, and whipsaws hard on strong volume.
ANET gaps out of a volatile, late-stage and jagged digestions and stalls immediately. Still not too bad, but neither is this signifying anything I’d bet my money on right now.
LNTH rolls over hard, gapping down 12% and entering a downtrend for the near term.
DGII, attempting to move out of a sloppy digestion on no volume pickup at all, implodes massively thereafter.
Moving on to the very low-quality names: DT, DV, LTH, HUBS and SDGR all blow up mercilessly. SOFI gaps up on earnings, and immediately sells off below the price it moved up from. WEAV reverses hard after an immaculately formed flag … excluding the fact that it was 95% off the Highs.
Reports for the last men standing, SMCI and CELH, will be this week. Brace for some volatility – specifically, SMCI has shown signs of climactic action over the last few months and is severely extended.
Another AI hype stock that still has the market by the balls, PLTR, will equally report this week. It’s a liquid beast, and likely has a great future ahead, but most likely at some point. Right now, it’s extremely overcrowded, and in a weak technical position going into its earnings report. The risk of another implosion is high, though not a given.
More signs of a severely overheating market are coming from more of the “crap” stocks – the AI robot stock SYM exploded up 50% in a single day, after a 500% rally, while the old dot-com semi star AMSC gapped up 60% in a single day.
When the retailer piles into low-quality names without avail, it’s time to reconsider. The signs are there, and you’d better heed them. Hubris comes before the fall.