Hello friends,
A volatile week has passed, where speculators eagerly jumped on board of a relief bounce after the bureaucrat bailout of a bunch of banks that were led by deranged executives who apparently thought ‘risk’ was a board game. Of course, this bailout is financed by the taxpayer, as any direct or indirect revenue by the government (both Treasury and Fed are de facto government arms in today’s world) comes from the taxpayer, and FDIC rescue funds are funded by banks i.e. fees pass on to their customers.
We will see how this banking crisis unfolds, as it still might turn into the cleansing and fear event I’ve been waiting for. So far, we’ve seen some fear, doubt and uncertainty (FUD) but not quite enough yet. The number of interesting stocks is slowly rising, but also not yet where I want it to see (see below) and most are in weak technical positions.
FAANG mask damage
This market is like the movie ‘Groundhog day’ – money is flowing again into tech mega-caps. The high-market cap FAANG tech stocks, namely AAPL, MSFT, META, GOOG (and also lesser ones such as NVDA) have held the NASDAQ Composite and SP500 up, while the rest of the market has shown stronger weakness (compare the charts below for NASDAQ, NYSE Composite, mid-caps and microcaps). Most western exchanges have also responded sensitively to the crisis, with European, British, Australian and Japanese indices toppling over.
Friday’s volume was heavily distorted by Triple witching and 3 instances of Standard & Poor Index rebalancing.
Also note that NASDAQ bounced on relatively light volume – that is not a broad buying of institutional money across the market, but a narrow focus yet that does not promise an improvement in market breadth. In fact, New Lows outnumber New Highs in the market by a factor of 8.5:1. You will definitively not see this in any new bull market.
FAANG tech attracted more capital last week (however, all are off 30-50% off Highs) due some shiny new AI release from MSFT but mainly due to the current banking crisis leading to the general expectation that the Fed will stop hiking at this week’s FOMC meeting. Problem is, we’re looking at a hot recent jobs report, high inflation, a strong consumer (which is though mainly financed by debt) – I think the Fed has no other chance than to keep hiking, though I’m not sure if Powell will follow the ECB for another 50bp hike. Even if so, neither a stop in rate hikes, nor rate cuts, should immediately signal that once should get in the market.
But then, it also doesn’t really matter, as I don’t trade Fed futures – I speculate in stocks. So at stocks I shall look.
Industrials stop leading
Some “good” news is coming from a look at sectors. The industrials, electrics manufacturers and other capital goods that had been some of the “leading groups” in this market, are pulling back in droves or are outright failing in their attempts in the last 2-3 months to continue uptrends.
Examples are FLEX, WCC, NVT, DE, CAT, PH, TDG, URI, ATKR, and there are many others.
This is good, because such industries really will not be the leaders of a new bull market, they are actually late groups to rally. Their starting to under-perform again is a good start, but only when their position is taken over by a stronger set of stocks, which is as of yet still absent.
While industrials pull back, consumer staples while not strong manage to hold up better, signifying and least partially renewed money rotation of funds back into other safe havens. XLP, CHD, PG, ULTA, PEP, HSY and others are bought or at least sell off less – classical signs of big money hiding.
Another cautionary tell is the relative under-performance of the transports sector. One should not insist of these leading in a new bull, but they do at least trend up when one comes along. Many of the recent stronger stocks such as ODFL or PACR are sputtering, which does not have to be the end of the story but is definitely a wrench in the works that needs to be pulled out first.
Commodities sell off
Overall, commodities and commodity stocks (excluding precious metals) have been rolling over as well, which is another sign of “better” change, though much work is left to do.
The CRB, a wider commodity index, has finally undercut its September Lows and is continuing its long-term downtrend. This is concurrent will sharp pullbacks in steel (e.g. NUE, X, MT, STLD), oil (e.g. XLE, SLB, COP) & copper (e.g. SCCO) – all likely signalling renewed discounting of lower structural demand and global trade, including still lowered output from China.
Gold leads strong
Gold futures have really outperformed the last few days, fueled by investor fear, fleeing into another safe haven following the problems in the financial sector:
However, most gold stocks are not actionable for me as of yet, with the possible exception of Alamos Gold (AGI) – this is what I call a slug, and I’m not really interested in such slow movers. Silver has followed suit, with both precious metals negating a restart of their January downtrends.
Leading stocks are few and behave choppy
The number of the stocks I’m interested in has actually improved somewhat over the last few weeks and months, but they are overall still very low in number and only a smaller number of them reflects what I’m really looking for and what should be seen in an improving market environment.
Overall, stocks are either choppy, sluggish or extended. Volatility is high, and high-volume buying producing alpha is lacking in a lot of them.
ASO for example is holding up great, but it is a retailer that is suffering from strong earnings and revenue growth deceleration, and its recent growing earnings along declining sales is somewhat of a bummer. The attempted move out of a flattish digestion pattern a few days ago closed mid-bar and is failing so far to attract real follow-up buying. It’s definitely a very strong stock, but I fail to see its appeal to big institutional money and in this market environment could not be convinced to probe this attempted move.
PI, ALGM, ACLS, MBLY, AEHR, FSLR are overall acting strong but volatility is very high and low-risk entry points do not form. They are likely over-crowded by a still large and complacent trader mob, and risk of joining in at this point in time is too high for me.
Case in point – look at SMCI what usually happens when too many eyes are on the same stocks. This tried to move ot from a faulty pattern and shook out >10% – enough to kill the position of anyone who manages risk seriously.
More stocks that behave well are ANET, ON, LSCC, RMBS – all older models that show some defects in chart or numbers.
Conclusion
I believe the picture is improving the long term, but the absence of heavy accumulation patterns across the market and constructive digestion patterns leads to me to be extremely careful in this market. I’m short a couple of names, which so far I’m net neutral regarding profits. Shorts in liquid names tend to take a while to start off and downtrends are more volatile, so I’ll be more patient and will either make money or get stopped out. It does not matter, as the large money-making opportunities that I’m waiting for are not to be seen yet.
It takes a lot of discipline, self-control and objectivity to survive a market such as this one. This is easier when knowing what to look for, being in sync with the market, and being in touch with your inner workings. Choppy markets will kill your account, bleeding it to death by a thousand cuts. Chop is the worst environment to be in, so remind yourself that if you have to argue with yourself to be in a market, and if you have to squint at charts and dig deep to find constructive opportunities, you are most likely not in a good market. Good markets are full of great opportunities, and the best stocks and low-risk buy points will stare you right in the face. Is this the case?