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Market review 23.01.29
Emerging markets, chips, and king price
It was another great week for stocks – especially tech, which I’ll review in more detail today.
As a sign of risk appetite, defensive sectors have been underperforming during this rally (just like they did after the Mar ’20 lows). That failed breakout in XLP:SPY was a big tell.
Among all the equity futures contracts that are included in the Commitment of Traders report, emerging markets (EM) stands out to me the most in terms of smart-money positioning.
Commercial hedgers bought EM very aggressively in Q4. They seem to be positioned for a significant move, rather than just a dead cat bounce ahead of a supposed recession that we keep hearing about. Also notice that these hedgers were record short right before the Covid crash of Mar ‘20:
Within EM, the leaders in the recent rally have been China, Mexico, and Argentina. Laggards have been India and the Gulf Region.
It’s interesting that it was the reverse during the bear market, as India outperformed China significantly. The ratio chart of these 2 biggest EM components is striking:
FWIW: A few months ago, the forward PE of China and India was 8 and 22, respectively. Now it’s 11 and 21. Some mean reversion has been taking place.
I mentioned the Gulf Region as being weak: UAE broke down decisively this week. Since inception 9 years ago, this ETF has traded tightly with WTI crude oil.
Related to all this is natural gas, which is now in a 71% drawdown. This week, UNG saw its largest weekly volume ever. Interestingly, oil stocks continue to shrug off the weakness in energy commodities with XLE and OIH hovering near 52-week highs.
Let’s now switch gears.
While I’ve been broadly bullish on stocks since early Dec, I had been skeptical of US tech. Resource and industrial stocks kept topping the 52-week highs list, while most tech stocks have been in big drawdowns and with weak momentum.
Here’s what I mean:
However, earnings season started for tech this past week, and there’s been enough positive price action for me to get interested. For example: There’s been a lot of breakouts (see SHOP, ETSY, Z) and failed breakdowns (see AAPL, PANW).
Similar to the V-shape rebound in China, the sharp reversals in TSLA and profitless tech have been quite something to watch. Last summer, three inverse TLSA ETF’s launched. They made monster returns in Dec, but have entirely erased those gains this month:
For the past 2 years, Cathie Wood fought trends in her active ETF’s with disastrous results. Now the funds shorting profitless tech are doing the same in the other direction.
The NOPE ETF is one such example. Launched 4 months ago, this fund was up 54% last month, but is now down 57% so far this month! On Friday alone, it fell over 15%. Ouch.
Let’s look at actionable ideas within tech.
Notice in the tech leadership chart from above that the leading stocks are concentrated in 3 categories: China tech, E-commerce, and semiconductors. The first group has been strong for many months now, with KWEB up a little over 100% from the Oct lows. What could be getting going now is the latter group.
Below is a weekly chart for XSD, the equal-weighted semiconductor ETF. It made a clean breakout:
Compared to all the charts being posted on FinTwit with diagonal downtrend lines, XSD is coming out of a horizontal base. This is a cleaner, less subjective, and just plain stronger chart.
You might be surprised to know that of all the non-leveraged ETF’s out there, XSD has been the top performing one over the past 10-years, with a 22% annual return! I’ll come back to XSD later.
Here’s how leadership looks like among semiconductor stocks:
Notice how all the bigger, well-known semi's (INTC, QCOM, NVDA, AMD) are in big drawdowns, while many of the smaller names are at 52-wk highs.
In fact, checkout the XSD:SMH ratio (equal vs. cap weighted semiconductors):
We see a 4yr breakout within a giant rounded base. Notice how this ratio began rallying since July, while the broader SPX didn’t bottom until Oct. Similarly, this ratio began rallying in late-2008 while SPX didn’t bottom until Mar 2009.
Side note: Last summer, while tech stocks were getting destroyed, I wrote a post about how some Internet of Things (IoT) stocks were making breakouts. It began with SWIR and then IRDM. It turns out, several stocks categorized as IoT are semi’s (eg. LSCC, STM, and RMBS).
Only price matters
The past few years have constantly reminded us that only price pays and to stay humble.
Challenging global macro:
The yield curve is the most inverted in decades and the media is focused on a recession, yet many parts of the market are making new 52-week highs.
ISM is below 50, yet industrials and materials are some of the strongest sectors.
Mortgage rates spiked, yet homebuilders are doing well.
We had massive tech layoffs, yet tech stocks are now displaying relative strength.
Challenging the news and opinions:
Mar ‘20: we heard how Covid would result in the next Great Depression. Yet the S&P 500 finished the year up 18% despite being in a 34% drawdown at one point.
Apr ‘20: Oil went negative. We heard how oil companies would be disrupted by EV’s and green energy. XOM got removed from the Dow in Aug before it climbed over 3x. KOL got delisted in Dec before coal stocks climbed 4-11x.
Oct ‘20: As ARKF was outperforming KRE by 130% YTD, we had Chamath saying how banks were obsolete thanks to FinTech. KRE has since outperformed ARKF by 240%.
Feb ‘22: Russia invaded Ukraine. We then kept hearing that Europe was facing an energy crisis. Well, in the past 11 months, Europe stocks have outperformed the US, while natural gas fell over 40%.
Oct 3, ‘22: Just days since the US dollar peaked from a historic 25% rally, Bloomberg comes out with this magazine cover. The Dollar is down 9% since.
Oct 15, ‘22: For a while we’ve been hearing that China is uninvestable. Then a popular YouTuber released a video titled “China’s economy is in bad shape.” FXI is up 40% since.
Nov ‘22: After FTX collapsed, we kept hearing how so many other crypto firms would go bankrupt. Yet BTC and the BKCH ETF are both trading higher than right before FTX collapsed.
The person that probably best mocks the news & opinions is Arun Chopra. You can check him out here.
I’ll leave you with this thread to reflect on:
That’s all for this week! If you found this post useful, please give it a like and share. Thanks for reading.
Important Disclaimer: This blog is for educational purposes only. I am not a financial advisor and nothing I post is investment advice. The securities I discuss are considered highly risky so do your own due diligence.