Hello friends,
Winter earnings season has kicked off, and we’re running into the week where most of the tech mega-caps (with the exclusion of NVDA and AVGO) that are almost exclusively responsible for the movement of the popular indices will report earnings. Expect volatility.
At this point I will briefly again pull your attention towards the stark divergence between the equal-weight S&P500 (RSP) and the commonly-observed cap-weighted one (SPX):
While the former has barely moved 25% in a choppy sideways fashion in 2023, so has the latter rallied about 40% and is at all-time new High price. Similarly the NASDAQ – all driven by the handful of tech mega-caps mentioned above, along a large money rotation into cyclicals and industrial stocks that supports the SPX.
This is also reflected by as good as any other average looking at the mid-/ small- & microcaps segments of the market. Divergences have started forming lately between these segments (e.g. the Russel 2000 ‘RUT’ below) & the popular indices, as well as in the NHNL gauge – less and less stocks, specifically from the “risk-on” camp are accompanying the index new Highs. Meanwhile, the VIX is at multi-year Lows and below 15$, a high-risk environment for dangerous volatility expansions.
Regarding the tech mega-caps, some are extended (MSFT, AMZN), some severely (AMD), and others trade erratically sideways (AAPL) or sluggish in choppy character (META, GOOGL). Not a good basis to support volatile reactions to financials reports, but this market is so full of America mega-cap tech- & AI-FOMO that we might as well see more rally.
Suffice it to say that the intermediate-term up-legs on the SPX and NASDAQ are exhausted and in need of a digestion, and risk of joining the move is currently very high.
The markets remains led by cyclicals
4-5 decade-old names have rallies >100% in 2-3 months in parabolic fashion, while the few new leaders with real potential that have shown up trade in a choppy fashion, showing difficulty to make any headway, act late-stage, and/or are seriously lacking liquidity (I refer you to last week’s discussion). Construction stocks and capital goods (construction, electronics, industrial machinery) have been leading while growth and innovative small- and mid-caps are nowhere to be seen.
The market remains of low quality – despite the continuing grind in the indices that is making the dip-buying passive investors happy, risk remains very high due to the low participation in the rally. Specifically the lack of new high-quality liquid leading stocks makes trend speculation in low risk/reward-ratio plays near impossible.
I’m currently generating income with options trading in bonds/currencies/commodities/stocks, while simultaneously looking at the Japanese equity market. There are a handful of names interesting to me (e.g. JP.6862), however the small size of this marketplace generates often unexpected technical setups that can be difficult to trade. Though the market is ripping upwards and has massive participation, the latter is as well largely confined to industrial and value stocks. I will not be expecting smooth rides, and will be applying extremely stringent risk management.
So long,
TGS
