Hello friends,
Economic and political news at the moment tend to read like a satirical mockery of modern society, but for the stock market, not a lot has substantially changed recently.
A thin market rally exhausts
Over the last 3 weeks, price of the popular indices (NASDAQ Composite, SPX) has been undulating in a very narrow price range, while volatility has dropped. There are tons of divergencies between various breadth readings and these indices, specifically the simple observation that almost nothing is rallying substantially except the old Tech darlings AAPL, MSFT, META & GOOGL, while the more average stock is going sideways after experiencing a minimal bounce from the Fed’s recent liquidity injection post the recent bank insolvencies.
In fact, NASDAQ’s recent “strong” rally into resistance from February and attempt to reverse the long-term down-trend is not corroborated by any other relevant market average. And the top-7 tech companies (i.e. FAANG stocks) in the Nasdaq-100 determine ~50% of its movement. Thin indeed.
As an example, take a look at the Russell 2000 (RUT)- representative of mid- and small-cap companies, the tranche of stocks that usually leads or at least confirms a new up-trend in equities in healthy markets. RUT has been in a volatile but range-bound for exactly a year now, as the ‘bear’ and ‘bull’ speculators fight it out in a scene reminiscent of Monty Python’s re-enactment of the attack on Pearl Harbor. No sign of confirming this recent NASDAQ rally to be seen.
And range-bound markets are dangerous markets. No trends, no real opportunity. From my perspective, there is not a lot of evidence to suggest we’re about to leave this choppy and hostile market environment anytime soon. Few leaders, choppy action, complacency and lack of institutional accumulation are just the tip of the iceberg.
Cyclicals and defensives dominate the New-High lists
There were few changes in the industries that were attracting speculator money compared to the last few weeks, months or even year.
Large bio-pharma and healthcare (e.g. LLY, GILD, VRTX, HCA, CAH, or European Novartis, Novo Nordisk), food producers, staples, now joined by fast food (MCD, YUM) and recently again the highly-recessionary car parts industry (ORLY, AZO,…) continue to attract buying.
However, as typical for such a choppy market, price action remains volatile and risk control difficult. E.g., the recently leading capital goods/industrials ATKR, JBL and LMT fail in their attempts to continue up-trends, or show wide price swings.
One of the few silver linings of late are the home builders – they’ve been moving up as a group since October, albeit reluctantly and without convincing price action. Last week, DHI gapped up to a 52-week High in price after reporting its financials – “only a 32% loss” YOY in earnings with 0% YOY sales growth. Reminds me of the ostrich sticking its head in the sand and mumbling “All is well, all is well”! Though, not all homebuilders’ financials have taken a beating in the last year of monetary tightening (e.g. PHM, MHO, MTH) and the recent price action is great against a choppy market. It remains to be seen whether this and next quarter reports can sustain that momentum.
First cracks appearing in leading tech
XSD, a group ETF for the semi-conductor industry, has shown a lot of selling volume a couple of weeks ago, is now starting to fall through its intermediate-term up-trend line. This is not more than a yellow flag at this stage, as only a failed retest of higher prices and consecutive lower price Lows would show a change in trend. However, this happening is very noteworthy, as the leading high-quality growth names at the moment are almost exclusively from this industry (ALGM, ACLS, MBLY, PI, RMBS, LSCC, etc), and there have been a couple of pullbacks lately here as well (e.g. ALGM, AEHR).
Additionally, some weakness or at times outright negative price action could be observed in leading telecom stocks but also across the wider industry (e.g. ANET, JNPR, CIEN, CSCO).
Meanwhile, a few of the FAANG stocks that are driving the bulk of the current index rally, which are coincidentally also winning the award for being the most crowded trades in the market (AAPL, META) are now sitting at their long-term down-trend lines – crucial decision point that might determine their fate for the next few weeks/months and likely strongly impact the indices. As earnings for all Big Tech stocks are scheduled in the next 2 weeks, the lately observed lack of volatility might find itself at the end of the line soon.
Lack of conviction in leading growth stocks
Similarly unchanged, the best stocks of the market show volatile price action and problematic volume profiles when trying to build digestion patterns (e.g. SMCI, PI, GFS, WING), and others pull back to perhaps form some in the future (ALGM, ANET). Moves out of digestions are fraught with volatility or lack of substantial follow-up buying (e.g. MBLY, PI, FSLR, IOT), and I believe only earnings surprises can at this stage lead to major price moves. Buying into a stock prior to its very close earnings release can lead to nasty surprises on the downside though, so care is to be taken.
MBLY, PI, both of which are struggling to move out sustainably from choppy digestion patterns, might gap up (or not) on financials reports that are scheduled this and next week, which might in turn bring either more positive (or negative) evidence to the health of this market environment.
LNTH and SWAV, two biomed stocks with elite fundamentals that showed price strength in 2022, have recently re-emerged close to their old price Highs. Depending on how the next few weeks turn out and how earnings are received, these might become interesting and perhaps actionable – but they are definitely not now, and I’ll keep my expectations low based on recent market dynamics.
Equally, ONON and IOT, the two new kids on the block, are showing great accumulation signatures and strong price action when compared to most IPO stocks from the last few years, but again are far from actionable yet.
Lack of conviction in leading growth stocks
Similarly unchanged, the best stocks of the market show volatile price action and problematic volume profiles when trying to build digestion patterns (e.g. SMCI, PI, GFS, WING), and others pull back to perhaps form some in the future (ALGM, ANET). Moves out of digestions are fraught with volatility or lack of substantial follow-up buying (e.g. MBLY, PI, FSLR, IOT), and I believe only earnings surprises can at this stage lead to major price moves. Buying into a stock prior to its very close earnings release can lead to nasty surprises on the downside though, so care is to be taken.
MBLY, PI, both of which are struggling to move out sustainably from choppy digestion patterns, might gap up (or not) on financials reports that are scheduled this and next week, which might in turn bring either more positive (or negative) evidence to the health of this market environment.
LNTH and SWAV, two biomed stocks with elite fundamentals that showed price strength in 2022, have recently re-emerged close to their old price Highs. Depending on how the next few weeks turn out and how earnings are received, these might become interesting and perhaps actionable – but they are definitely not now, and I’ll keep my expectations low based on recent market dynamics.
Equally, ONON and IOT, the two new kids on the block, are showing great accumulation signatures and strong price action when compared to most IPO stocks from the last few years, but again are far from actionable yet.
Summary
There are only few group moves developing at the moment … and none of them is in US growth stocks. I am seeing some solid opportunities in gold explorers/miners and Japanese equities (expansionary monetary policy still alive).
Growth stocks are so few at the moment, that they are obvious and likely severely over-crowded – which means that any sign of weakness could lead to a cascade of stop orders being triggered and high volatility. I think that at this stage only visibly positive reactions to earnings (earnings gaps) can be a viable trade, but one should not expect them to turn into massive winners against the backdrop of this hostile and choppy environment.
There is opportunity, but it comes at the cost of heightened risk of whipsaws and stop-outs. And even if you manage risk, many stop-outs in a row can equally add up to a large loss. There is no free lunch in the stock market, thus I suggest at the moment to look elsewhere for greener pastures, or even just sitting on the sidelines until a clear new trend emerges … which could happen as early as next week and as late as in a a year or more from now. Be patient, good times will resume eventually, as sure as the sun will rise again.