Micro Quad2
Give this market some time!
Here we go, Micro Quad2 is a bit more volatile than Micro Quad 1 and we saw it this week:
We are still in Quad2, yes Quad3 exposures emerge, but that is the difference to Quad1: higher beta cycs join the party and the market is a bit crazy with daily rotations.
Am I worried? Not really, fintwit is freaking out because the QQQs put in 4 distribution days and weak seasonals come up.
Well, we got much more bad news:
(1) Distribution days on QQQs, (2) weak seasonals, (3) the fed hiked (!) (4) the US got downgraded (!) and (5) Interest rates rally like hell (!). In a weak market this would be enough to tank 7%-10% and sheer hell would break lose on high beta exposures.
Also, what I do not see is: positive earnings with sell offs. O.k. and good earnings (AMZN) reports still get bought and even weaker reports (for example TZOO) names do not get destroyed.
Plus, there are 0 (!) quad 4 exposures with a bullish trend (relative strength above the 20 week moving average of relative strength and a one week relative strength high) and they are down with the market this week (and a lot are down the second week in a row, while we had and an up last week on the SP500).
In an emerging quad 4 environment they are up when the market is down (just to get dragged down with the market a little later, if quad 4 persists): This is not the case now. Quad 4 exposures are weak, and they do what they do best: trend terribly in no man’s land!
Yes, we get some consolidation here, but I would be more worried if we would not get a consolidation. You do not get consolidations in bear market rallies; they are spiky while the slope of the 20-week moving average line is still negative.
I do not see that spike; I am seeing a flag and the slope of the 20-week moving average is clearly up. Yes, that does not mean we get a one-way street of up, up, up.
And it depends on your strategy. If you play super high beta breakouts with no earnings that environment might be too weak for new positions. Understood. But panic?
Look, there are no “easy” markets, a bull phase consist of pullbacks:
We could get a 10-week consolidation like in the above example with the QQQs being down > 7% and we still would have a bullish trend.
Some highlights:
SPY Tech timer (concentrated tech stocks out of the SPY with earnings up estimates, the lowe high shows weakness, but as long the low before the last breakout holds we are fine):
High Beta (seeing some cracks here, pure high beta is not the place to be!):
So let me break down which strategies are doing well in this environment:
Quality (BRKA) does well in Quad 1-3
Everything with very good earnings (rate of change based!)
Small cap value momentum Quad 1-3. My best guess is that small cap value momentum will do very, very well. Valuations are off the charts (in a positive way!) and almost nobody is positioned!
Episodic earnings or news pivot breakout strategies (they almost work in every market, work very well in Quad 1-2, well (shorter term) in 3)
What is under pressure now?
New CANSLIM positions (outside of earnings pivot breakouts), giving winners time that behave o.k. is fine. Use that pullback to refine the watchlist.
And gun to my head: recent themes like AI (with no earnings), FANG —> my best guess is that the market looks for new themes.
No touch —>
Long term duration high Beta (ARKK names) too much Quad 3 stuff is emerging (ARKK hates Quad 3 and 4!), interest rates get to those names fast, valuation and earnings matter now more. ARKK holds up pretty good, but I think this bull will be different to the bull of 2020. Interest rates are just too high for a go-go market in “trash”. Could change fast as soon interest rates drop (not the case now!).
Bonds / Gold —> wait for a bullish trend and a Quad 4 environment
Dollar: yes it is holding up very well, but it is not bullish trend!
Defensives
All in all:
This (mini!) pullback behaves constructive (in the context of fitting strategies, see above). Give this market some time.
As long correlations do not change (Quad 4 exposures getting a bid when the market is down or a rally while Quad 4 exposures get strong too) I stay constructive and (small cap value momentum) long.
I agree with Mark:
All right, have a great week!
All the best and best regards.
Andreas
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