Hi friends,
Earnings season, and thus liquidity-moment season, is now in full swing. There’ve been a couple of positive but also negative developments which I will detail below, and by and large the climate of the market has not markedly changed. Participants are now eagerly awaiting earnings reports, and I am eagerly awaiting and observing earnings reactions to gauge the market environment.
Though I’m not actively trying to be bearish, I can’t help but feeling something is off with this rally in a major way, as I’ve detailed in my previous Market Insights. Judging on individual stocks and volume signatures near key junctures, this market appears to largely move on amateur/retailer frenzy, with little genuine accumulation.
Select market segments attempt to confirm rally
The current market rally in the popular indices NASDAQ Composite and S&P500 has so far been incredibly thin (e.g. read here), largely driven by a narrow set of mega-cap stocks, cyclicals and collapsed past leaders. In fact, the ludicrous concentration of the cap-weighted NASDAQ-100 led to a rare special rebalancing, so far only seen twice since NASDAQ’s inception.
Though, at least on the surface, breadth has somewhat improved, as a couple of important ETFs & indices have started staging trend reversals above their critical respective 2022 or 2023 Highs:
Shown above are the NYSE Composite (NYA), the Dow Industrials (DJIA) and the Russel 2000 Growth segment (IWO), each marked with technical levels associated with long-term trend reversals (red line). The NYA advancing is great news, as it is a fairly broad (though heavily cyclical-biased) average, while the DJIA is a thin 30-component index largely obsolete and its rally only lending supportive information.
The IWO ETF however moving up is a great sign, as it reflects the more risk-on part of the small- and mid-cap stock segment of the market … where legends are made.
This confirmation of the rally though stands on very wobbly legs, on the one hand because it is very fresh (rather, still an attempt at a confirmation) and already showing first signs of struggle, on the other hand because averages are averages, and stocks are stocks – and there has only been a worsening of price-volume action in the leading stocks of this market. Drifting averages don’t mean you’ll get rich quick.
General market action and earnings reactions
For the last few months, price action on NASDAQ and S&P500 has largely resembled that of 2021 – up, up, up, driven by mediocre mega-cap “Safe Bets” and money rotation, filled with air pockets and whipsaws in small- and mid-cap stocks. But while 2021 had some very strong stocks that were tradable and profitable at the time, there are few of such nature here that could be traded with low risk.
Specifically, the last 2-3 weeks have driven the indices up radically, which was fiercely interrupted by the first earnings reactions to our beloved FAANG/MAANG/mega-8 stocks, namely negative reactions resulting in some renewed distribution on NASDAQ.
Tesla (TSLA) and Netflix (NFLX) got suckerpunched, which coincided nicely with a technical rejection of TSLA at its long-term down-trend line. These are certainly more cracks forming in the nice utopian sculpture that the perma-bulls are painting of this rally.
Specifically, the S&P has experienced less volatility the last few weeks due to the financials (interest rate sensitive) and industrials sectors pushing some minor wind in the sails.
All eyes are now on Microsoft and Apple reporting next week, and although I personally find them non-tradable stocks, they are important to the market as they are among the most liquid index-steering beasts out there, and reactions to their reports will most certainly give us more indications of what market stage we’re in. They’re both in technically weak positions, and have previously rejected moving into new High prices with conviction. A decision point is approaching fast.
Chips and tech get slapped around
The main theme of last week was stark volatility in chip-exposed stocks after Taiwan Semi (TSM) reported earnings and lowered forward guidance significantly – TSM serves 60% of the global market with basic chips and supplies a whopping 90% of the advanced ones.
An immediate knee-jerk selling ensued in the whole industry, as seen on the SPDR semi-conductor ETF:
The damage was much more pronounced in many of the bread-and-butter chip stocks that had just started advances on low volume, negating questionable digestion pivot levels (for example LSCC or MPWR) – but still, the darling chip stocks of the market are holding steadfast (NVDA, AVGO).
More selling in other leading sectors
Other whipsaws of stocks that had recently been attracting capital inflow/cyclical money rotation could be seen in the homebuilders and car dealers, largely catalyzed by negative reactions in D. R. Horton (DHI) and Autonation (AN).
So far, earnings reports have brought largely downside volatility, excluding in a few financials which had no choice but to rally on growing profits stemming from rising rates and business grab from the March bank insolvencies.
We will see how the next 2-3 weeks turn out, but so far the market has been using the earnings liquidity moments to get out of stock, rather than in.
Digestions continue to resolve negatively
There’s not sugar-coating – there are very few sustainable strong market leader candidates, and the few there are are displaying more and more questionable price-volume action.
ACLS and RMBS, both a bit older stocks but still so far staging acceptable rallies, have each failed to move across key pivot points without attracting buying demand after digestions, and are whipsawing and selling. Let’s get down to brass tacks here – there’s really no need to discuss more. Failure of strong leading stocks to move out, to attract follow-up buying demand, and a general lack of quantity in them can only suggest one thing, namely that the market is by far not as strong as the NASDAQ rally would suggest.
The same dynamic can be spotted in all the failed leaders from the past cycle that are being talked up by social media pundits – SOFI, DT, PLTR, BILL, HUBS. Though not all have failed, neither substantial volume nor price traction has come in, and the fact that these stocks that are played-over and buried under overhead supply are among the trades that this market is offering, is another nail in its viability.
Concluding
I believe this earnings season might shed some more light on where the market is heading, but by no means does the rally have to be over. Dysfunctional markets can rally for longer than most of us hope, and after doing some basic social media opinion polling you will find that there is still a large quantity of market participants in utter disbelief of the equity rally (largely though due to economic and valuation reasons, rather than looking under the hood of the market), sufficient to lend enough contrarian firepower to drive this runaway train higher.
The main question for me is, over the next half a year, will there be some sort of a major market liquidity shock, or will the rally drift up further? I don’t know, and no one can know. But I can look at the market and say with strong confidence that the odds are not on the side of risk-aware stock speculators. There is ice on the roads – that does not mean that there will be a major crash, but it means that the basic conditions favor it happening.