Look Out Below

I am overdue for an update on our Fund and the markets. I have been waiting to see if the Market participation will broaden and gain real strength. That has yet to happen, with individual stock participation remaining very weak and getting worse. Even more ominous is that the Market has been unable to stage a rally after its July peak. 

Below is a chart showing the percentage of Nasdaq composite stocks above their long-term moving average vs the Nasdaq composite performance.   As you can see, the performance of the Nasdaq, shown with a red arrow,  is very strong, starting around the lows in October of 2022. The percentage of stocks in the same index above their long-term moving averages, shown with a green arrow, has been lackluster and is now sitting around 24%. This means roughly 75% of the stocks in the Nasdaq are not in an uptrend.  

Such a divergence is happening due to a few big-cap tech stocks such as NVIDIA, Microsoft, Apple, Google, Amazon , Tsla, Netflix, and Meta. I read an article in Morningstar recently that said they can’t find a time the indexes have been so heavily moved by so few stocks. 

Also, if you look at the blue arrows on this chart, you see that this trend of big-cap tech masking the weakness in the market started in late 2020.  I interpret this as an encore of the old bull market and not a new one.

The Market cannot survive when the breadth of a rally is so few names. Either the Market must start to broaden out, or the weakness will catch up to the big-cap tech stocks as well. To some extent, that is already happening, with only Google and Meta holding firm.

Our Fund has lost and gained the same 2-4% since inception as I attempt to make some money only to have the smaller cap stocks fade away, or worse, gap down and sell off hard on trivial news. The stocks that have held on to some gains are also in highly cyclical industries that tend to be volatile and difficult to manage risk.

My stock picking has been and will continue to be very limited and small until I can make meaningful progress, which will occur once we see more individual stock participation, without big volatility, from faster-growing small and mid-sized companies.  

The Market typically bottoms long after the Federal Reserve cuts interest rates. They are still discussing further increases and keeping them higher until 2026.  Given how bad economists are at predicting the future, I suspect the date rate cuts arrive will be nowhere close to what they are thinking today.   

Until our next update, keep your powder dry and enjoy the ride.  The longer the pain in the markets lasts, the greater our opportunity will be to make big money in the future.