Hello friends,
On the heels of the latest inflation report, a whipsaw of volatility has appeared – however, so far it has ‘only’ rattled the small- & mid-cap indices such as the Russell 2000 (RUT), while the popular indices SP500 & Nasdaq Composite (COMP) have largely been spared major selling.
Mid- & small caps rallied strongly (continuing from last week), gapped down heavily on Tuesday, and rallied back up in a major show of volatility (also temporarily visible on the VIX spiking to 18$ before pulling back again). Indices such as the Russell 2000, SP400, SP600 or microcaps are on the verge of confirming the uptrend of the Nasdaq & SP500 by being close to breaking to Higher Highs in the intermediate-term trends and above their 2023 side-ways trading ranges.
However so far this confirmation has not taken place – it might this week though.
As for the last year, popular indices continue to be heavily biased and driven by crowded mega-cap tech companies running up on AI euphoria, while the rest of the market has been chopping sideways. The par-excellence AI FOMO stock NVDA reports financials this week, which will be another datapoint to measure the strength of this rally against.
Climactic exuberance continues in the leading stocks
One of the more dangerous tell-tales of a topping market is late-stage and topping behaviour in its leading stocks. We already discussed last week some major signs of exuberance that have appeared in some of the leaders of this rally, specifically ARM’s IPO and BMR’s detonation (though not so much of a ‘leader’) on news of its partnership with NVDA.
The big climax run of one of the few (& choppy) other leaders of this market with a name that could be straight out of the dot.com bubble (Super Micro Computer / SMCI, producing server hardware) has been the major event of last week. After a near 250% parabolic exhaustion move in a handful of weeks off a late-stage digestion, SMCI staged what Jesse Liveremore termed a “1-day reversal” or what Gerald Loeb called a “stilt formation” on Friday on the highest volume in its trading history – a classic and clear sign the large smart money is bailing, selling huge block of shares into the hands of willing retail buyers that are listening to the malicious analyst upgrades by Bank of America etc. You might see temporarily higher prices (10-30%) in the next few weeks/months as the institutional money is trying to repeatedly mark up the stock to sell more at higher price, but the move itself is over.
With SMCI topping out and few other leaders in place, of which most trading character is choppy at best (e.g. NXT, IOT, CELH, VRT), the risk of staying heavily long this rally is growing more and more.
Don’t get me wrong – the popular indices may continue to rally for a while, driven by AI mania in the liquid large-cap tech stocks, however there is few truly tradeable material that can make you sizable profits in short period of time without taking large risks. For this market to continue to stay viable and tradeable, more and new strong leading stocks need to appear sooner than later.
This is really all there is to say for the moment – stay patient, stay flexible, and opportunities will come your way.
So long,
TGS