Hello friends,
Another week has passed in the market, with volatility and chip-chop reigning supreme and lacklustre character. The Federal Reserve has confirmed expectations by only hiking 25bp, and indicated that there will be another such hike in May and no cuts until 2024 at the earliest. Traders however, due to the recent glass shattering in the financials sector, are calling BS and are putting the chance of ending the year at lower rates in excess of 95%. Rates have been higher in the past, but the ascent of the rate increases so far are unprecedented in the history of the Fed.
One could argue that having no risk control is reckless as in the case of SIVB, but we are coming to the point where we might conclude that most banks have not hedged against interest risk sufficiently mainly due to the fact that there is no historical precedent and thus no logical reason to expect such a radical change in policy in such a short window. In any case, the Fed pledged that they will stay data dependent in their fight against inflation, and judging from recent central bank responses to inflation and price pressure readings in the UK and the EU, things will remain interesting over the next few months.
Mega-caps remain bastion
In the face of the recent turmoil, credit spreads have widened and markets thinned. There has been limited interesting action across the market, so this report will be short. Some market commentators have expressed wonder at the popular indices of NASDAQ and S&P500 holding up the best during the last few weeks, compared to the average stock. As discussed, the usual tech mega-caps are what’s keeping them up – the narrower the index, the higher the disparity. For a broad comparison of this phenomenon, compare the cap-weighted (SPX) and equal-weighted (RSP) S&P 500:
This comparison shows you how much the few mega-caps have kept the market up last week. It is easy to fall into the trap of trying to over-analyze dynamics in the short-term time frames, but I believe the complacency in this market environment is still urging the average money manager to keep buying the dip in Apple, Microsoft and their old favorite semiconductor darlings stocks, indulging at hopes of a more dovish Fed in the near future. As the markets are probabilistic, anything can happen and I will refrain from posting what I think will happen – but the volume in the bounce of the Nasdaq, the exchange that harbors all these old dogs, has been dismal. Bad action usually begets more of the same.
Financials & transports resist the Kool-Aid
Anything from brokerages, regional banks, large banks and money centers and insurances have continued being sold by speculators (e.g. see the SPDR Financials ETF XLF), pricing in continuing fears of seismic waves from the recent collapses. There seems to be few trust in the words of officials that try to assure that “everything is fine, nothing to see here“. I am doubtful we’ve seen the last of this, with last week’s Deutsche Bank rumor mill on the go.
The transports sector (IYT), usually an early herald of a new bull and improving environment, is following the selling and made another lower Low last week. This bad action was seen across rails (e.g. UNP), truckers (e.g. ODFL), shipping and packaging. Not what you would want to see in a new uptrend – of course, such stocks don’t respond as heftily as say a fledgling growth stock, but they need to trend at least in a similar positive direction.
Staples are choppy but remain a leading group
There have been minor rotations between groups (e.g. tobacco was sold, car part resellers pulled back), a lot of high earnings-stability stocks and consumer staples are still in vogue with the big money. When cereals (e.g. GIS), confectionary & chocolates (e.g. MDLY, HSY) , frozen foods (e.g. LW), run-of-the-mill beverages (e.g. MNST) and fit-any-budget cosmetics (e.g. ELF, ULTA, COTY) lead while high-quality grand stocks are a rare breed and a range-bound market persists, you shouldn’t expect too much too soon in the area of profitable stock speculation.
Leading stocks show few conviction
One of the most important things I’m looking at when determining the health of the general market is the behavior of the leading stocks. As a summary, there are potential stocks arising that might make for great opportunities once the market turns reliably, however so far they are few in numbers and show a lack in constructive price-volume signatures. Opportunity exists, but it comes at a hefty price, as the volatility that currently percolates the wider market is the kryptonite of risk management.
The most interesting stocks of the market remain unchanged – ACLS, ALGM, SMCI, FSLR, AEHR, PI, LNTH, MBLY, GFS. Especially, SMCI has reestablished itself as a leader, strong recent action negating its earlier stumbling. The problem is that they’re so few in numbers and so obvious and crowded, that clean digestions are unlikely to form soon, and advances above pivot levels or into new high ground are likely to be faded by larger trading desks and to trigger whipsaws.
ACLS, ALGM, MBLY, GFS, AEHR & PI are all semi-conductor/SoC/sensor producers with great market positioning, however their stocks are either trading choppy or have undigested advances likely to attract profit-taking soon. PI and MBLY are each forming somewhat of a wobbly digestion pattern, but again, the choppy market will make entries difficult and prone to roll over.
A new prospect that has appeared on my radar lately is the small sports show retailer ‘On Running’ (ONON). ONON is liquid, dynamic, and sports triple-digit earnings and revenue growth – as price action indicates, just what the smart money might be looking for. However, it has merely recently started becoming interesting, and a weakening market can nullify this in the blink of an eye. I won’t consider this until the market strengthens and widens, and price needs to advance at least beyond $40 level, ideally over $47.5 or so.
Concluding remarks
My general impression is that the large money is not accumulating specific stock selections with commitment, but rather are forced to make certain commitments i.e. rotations into what they believe to be safe havens. Overall, it feels like the composite mind of market participants (i.e. the stock market) is waiting for something momentous to happen. Perhaps the first few banks collapsing was the proverbial stone that might start an avalanche in the months to come. However, as bad as the media blew up the news, so far I don’t see genuine ‘puking’ in any shape or form that usually comes along market bottoms, nor any large-scale black swan events unfolding that would force the Fed to start the next round of QE.
People are calling for rate cuts, but we’re still far from seeing those … and even then, bottoms historically tended to occur a quite good while after the air was let out of the balloon. Risk is not in any good relation to reward right now. Should better opportunities develop, I’ll be willing to change my mind quickly, but only on the presentation of strong evidence.