Hi friends,
The headline might be a bit over the top, but it quite so embodies what I think about being long the market at the moment, with very few exceptions.
Yields on the 2-year treasuries have made new Highs last week, from which they’ve been rebuffed since slightly … but bond yields aren’t stocks so I think the trend for the next few weeks to months is very likely to the upside here.
This is of course not the greatest news for stocks in the short-term, as the rising dollar and yields throw a much-needed shadow over the recent advance. But it’s great for the long-term … the more negative the environment for an extended amount of time, the greater the opportunity looming behind it.
Markets bounce in short-term relief
In the past, Fed officials restricted themselves to the following: The Fed chairman himself only would give a brief press conference after the FOMC meeting, dishing out next actions on monetary policy.
Nowadays, at any time they please, all the central bank presidents dole out opinions, expectations, guidance and probably cooking recipes next. The public relations of the Fed have become somewhat of a celebrity outing, demonstrated by the Atlanta Fed president Bostic musing on his expectations on future monetary policy at a racial inequality event. What gives?
Anyway – people tend to search for reasons and catalyzers for market movements. So be it his comments, NASDAQ heavy-weight facebook’s VR headset price reduction (which was likely due to lacking demand?!), Broadcomm’s earnings report, or whatever else you want to use to explain Friday’s move, feel free. The fact remains, as I said before, that the market was short-term extended to the downside and was due for a few days of bounce. I expect 1 to 2 weeks choppy side-ways/uppish, but trying to predict anything in the markets is futile. I guess we will see how this news-driven market will react to the next FOMC candy give-away on March 22nd/23rd.
However, weak action outweighs strong action in the indices by far. Heavy-volume selling and reversals last week outweighed any worthwhile buying, and even Friday’s rally, though staging and impressive almost 2% on the NASDAQ Composite, was on weak and just about average volume. Monday and Tuesday were gap-up reversals and churning on volume, a classical sign of selling. Accumulation signatures have all but appeared since the beginning of February brought the retailer back in the market.
Friday’s bounce again largely hot air
Screening for what really led Friday’s rally, I came to the conclusion that it was mostly the same old unhealthy stuff that had brought FOMO into the market recently already. No strong new leaders, but uninspiring or outright low-quality merchandise. The standout performed was once again c3.AI stock on an earnings report showing still that they are losing money and their revenue is actually decelerating year-over-year. The FOMO retailer will jump on anything these days, but the fact remains that this and as good as all other stocks that rallied substantially are under overhead supply like Atlantis is under water. Such bottom-fishing on largely low-quality stocks cannot turn this market around, but it will delay the to my eyes inevitable.
Internals do not inspire confidence
This rally started in mid-October last year, and only for a brief window of time had stocks making new Highs outnumbered those cracking below old Lows. There can be some delay in this metric confirming a new bull market, but it very rarely starts popping up into positive territory 3 to 4 months after a supposed bottom as it did here in mid-January to February.The New-High-New-Low gauge should have kicked at least into first gear around November and at latest December.
Right now, stocks making new Lows and those making new Highs are about even in number, showing the perpetual fight of bulls and bears, but as of now not strong enough to raise hope for substantial improvement.
Defensive industries and value sectors remain strong
In the very long-run, the relative strength displayed by the odd transport and hospitality stocks (e.g. H) do lend some credibility that the market is starting to discount beyond an expected economic recession, but I have to say that the amount of noise is just still too high to make any worthwhile statements here.
However, for the more short and intermediate term analysis, it’s pretty clear that growth industries do not inspire confidence to the big institutional money. Capital has and continues to rotate into commodities (energy such as oil & coal; steels e.g. XLF, STLD or NUE), materials and construction (e.g. GWW, WSC, BLDR, ATKR, CBT or UNVR) and industrials (e.g. CAT or TT).
While there is some positive momentum to be gained for the longer-term development of the market from large bio-pharmaceuticals such as AMGN, GILD, JNJ or LLY, for the moment this however only means that money is rotating elsewhere but growth.
Leading stock action remains uninspiring and thin
Despite there being a number of stocks that are behaving better and showing useful fundamentals, this market remains thin and underfunded by institutional money and mark-up.
The best stocks in the market remain MBLY, PI, ALGM, GFS, FSLR, ACLS and SMCI. SMCI, PI are experiencing choppy trading – they are holding strong, but are not acting great, and supply-demand balance is not achieved. Especially SMCI displayed bad action recently and despite a strong NASDAQ move did not advance and lead to the upside – a problem.
MBLY and GFS, similar in liquidity and the highest-quality stocks of this group, are holding support (a good sign) but upward momentum is held back by the weak market. MBLY might continue moving such as ALGM, but if might also turn into a choppy side-ways pattern as GFS did, after the latter displayed similar strength back in March/April 2022.
Overall, great stocks, but not enough and not the right time to try to enter them for me.
Big volatility came into AEHR and ACLS on Thursday, two semi-conductors with strong silicon carbide exposure that suffered strong (at least intra-day) selling when Tesla announced they won’t be needing so much of the material anymore. AEHR at one point of the day was down 34%, but recovered somewhat to close at a 15% loss. ACLS recovered well and closed high on volume, a show of support.
The troubling issue is that such volatility should not really occur in such stocks, which trade $56M and $76M a day. Such whipsaws and shakeouts are generally constructive in nature for the stock if they close high (which only ACLS did), but if such excessive volatility is observed in two of the strongest stocks of the market (technically and fundamentally), it underscores the weakness of this market.
Overall, this small number of stocks, of whom most are in a single industry (semi-conductors) does not represent enough firepower to drive a sustainable rally.
The market remains fragile, new highs are rarely supported in only selected stocks, and volatility reigns supreme. I will remain cautious – though there are opportunities both on the long and short side, this is certainly not a “plunge in” moment.
So long!