Market Update: Technically Speaking

Give me consolidation or give me death!

Give me consolidation or give me death!

The trend is your friend is an oft used and over-used phrase on Wall Street, the equivalent of a surfer dude giving you the signal:

Yes, it is true that the stock market moves in “trends”, sometimes violently shaking out longs and shorts but often in a trending pattern that can be helpful for predicting market pivots.  The S&P 500 is up 13.25% for 2023, thanks largely to the mega caps which have led the Nasdaq up almost 29% this year.  You know this already!  In our substack “Nobody ever got fired for buying IBM” we stated the market environment was similar to the Nifty 50 1970s rally of “one decision stocks”.  The one decision?  To buy and never sell is what has been happening mostly in the index heavy weights Apple, Microsoft, Meta, Netflix, Google, Amazon and…..Tesla.  The Tesla rally is a bit mystifying adding $100 per share or $300 billion in market cap since their March quarter disappointing earnings report.  Tesla is the most profitable EV company, engaged in a price war in order to maintain market share and pressure those (everyone else) competitors to even larger financial losses in their attempt to make EV’s as well as ICE vehicles.  Imagine a dot matrix printer company late to the party trying to sell those and also compete in laser printers!  However, there is no rational reason, update or outlook that suggests the Tesla rally makes an ounce of sense. 

Short TSLA then?  Nope!  Possibly trade it based on overbought/oversold levels to scalp or wait for a piece of news that the market should react.  MS downgraded Tesla stock on Thursday and lo and behold, it went up!  The next day it dove lower on no news.  Some battles are just not worth fighting. In my view, the animal spirits or FOMO we all see daily in the markets is sending the message of a pain trade in both directions.  Managers wanting and needing to participate during the uptrend and those trying to apply logic to valuations and news.  Add algos and CTAs who are now max long and you have a recipe for higher volatility ahead, something which has shown no signs as of yet with the Vix at a 12 month low of below $13 on Thursday.    

We like to think of this as “the buyers live higher and the sellers live lower”, meaning it is a game of chicken, rationalization name by name and the entire market as we approach the mid point of 2023.  Even AI cuts both ways!  AMD rallied from early May prices around $81-82 to a high over $130 on becoming an AI play soon with their 4Q introduction of the MI300 GPU.  True, AMD CPUs are also used in AI workloads, but the stock became a massive sell the news after their AI day dropping to below $110 last week.  If you believe AMD can earn $5 in 2024, the stock probably sees $150 in the next twelve months.  At the same time, perhaps NVDA will sell $20 billion of AI chips by the end of 2023 causing a more modest ramp for newer competitors to the high end of AI workload processors (a crowding out effect).  Regardless, we try and keep in mind big picture what Amazon AWS CEO said this week:

“Generative AI equals a massive increase in workloads with significant demand for years to come.”

And remember those workloads become recurring revenue streams for MSFT, GOOGL, AMZN, DDOG, MDB etc.

We all know the tickers that should work at any given time.  The key is trading them accordingly and not getting shaken out from your convictions but rather managing risk when the trend changes, often not fundamental based.  When the boat is full of longs and there is no incremental buyer (short cover) left, a stock or the market forces the late buyers and others to sell rallies and avoid further pain.  Tesla did not look to be a fundamental long at its lows around $150 given the fundamental story after their 1Q report.  If you shorted at $200 thinking you got a good entry point, you needed to risk manage and realize the trend might have changed.  So, combining fundamentals and technicals, let’s see how TD MA2 charts look for the indexes.  To remind, the MA2 trend follower changes colors after it reverses from up to downtrend or vice versa. 

TD MA2 is a technical study that stands for Tom DeMark Moving Average 2. It is a series of two moving averages that are displayed differently from other moving averages. Each moving average is compared to its value “X” bars earlier and each will turn green if ascending and red if descending ¹.

Let’s go to the charts!