Purging of the 'mega-cap' stocks, leading the heavy lifting to obscure the exodus not just of a majority of stocks before the recent spate of S&P selling, but contributed to the 'perceived' mood of a structural decline.

Pixabay

All year we 'required' Banks & Oils to be firm and Oil itself to rally, allowing at least a semblance of off-loading of heavy lifting stocks to occur while Indexes continued to mask the 'actual' evolving decline. That's why the term used was 'Generals out ahead of the Troops', who remained in the trenches.

Our forecast was for the Generals to retreat to those trenches, where a line of defense (yes there will be a defined area to try defending, but not yet) still has time to develop (likely no sooner than later this month) before much buying.

Executive Summary:

• Friday (start of Q4) strength was expected to surrender to renewed selling pressures, and while a washout and Tuesday turnaround is likely, we stay inclined to be defensive and suspect that 'more fear' is needed for a low.

• Hence for now rallies will occur, but within context of the overall patterns discussed for weeks (really months) as a top-cap-heavy market inviting a purge in the seasonally weakest season, happens to be Sept./October.

• The Facebook issue of 'social responsibility' has merit to be debated (for that matter we've pondered not only their policies but advertising claims to those that buy ads), and we've been negative on FB for quite awhile now (FB).

• I recall noting the time GM pulled-out for a year because a slew of phony responses, led some to ponder 'why' 3rd world 'clicks' for Cadillac lease ads got hits in countries with no dealers (confused with 'cataract leases'.. sorry for my poor effort at humor, must lighten-up on heavy days) (GM).

• Speaking of, something more may be afoot, given that all properties of Facebook were 'down' today (Instagram and WhatsApp), with total outages/networking issues.

• A security concern is if that might have been related to a separate issue, workers keycards wouldn't work earlier today to get into their buildings.

• That's interesting as the outage was DNS-related and building entry for sure would be distinctly independent from a Domain Name takedown, of course if there was coordinated sabotage that's another story.

• One point I've made and like to emphasize: so many now say the market is terrible and so on, and there's debt risk (there absolutely is), however it is an anticipated bearish phase (hopefully within context of a longer-term upward bullish cycle dating from March 23, last year) that reverses later.

• This matters because of 'insider selling', which has been enormous for a slew of the mega-caps this year, and it didn't take rocket science to figure that out.

• That prolific insider-selling was masked by Oil & Banks, we've noted that for months now and (humbly) that didn't take rocket-scientists algorithms.

• I mention this because 'now' the algorithms kick-in and validate what I've called a 'charade' of a market (distribution under-cover of firm Nasdaq and S&P), with a risk of a 'trap door' effect once the algorithms kicked-in.

• So they've kicked-in and surprise, the stocks with the heaviest selling by the very insiders that had engaged in large buybacks and so on crumbled like toy soldiers guarding the trenches (sorry, made me think of an Afghan Army that didn't fight at the end, but they actually got a bit of a bad rap on that for a few reasons, including the pulling of essential air support).

• Hence whether Facebook, Amazon (AMZN), Google (GOOGL), Netflix (NFLX), Nvidia (NVDA) or others are under pressure isn't so much the point, it was set-up to fail by virtue of the very characteristics of the buybacks coincident with rising earnings as we emerged from the worst phase of the pandemic, and maybe a growth peak, point being they were sellers in the 2nd and 3rd Quarters regularly.

• Small stocks are simply eroding, with few exceptions like Sorrento (SRNE), as it gets clobbered mercilessly seemingly by short-sellers, again we prefer to play the future FOMO (it's FOMO because they don't have much revenue yet so it's a bet on what may or may not unfold) with options, less stock.

• Nevertheless we recognize that despite the emphasis on it being entirely speculative, their circumstances could improve dramatically depending on results from clinical trials, as well as 'evidence' of marketing antigen tests.

• However I was mystified as to 'why' Dr. Ji said he wanted the U.S. trial of 'covi drops' before releasing top-line data from the U.K. trial, that bothered me (and others as funds heavily in this stock may be troubled by waiting), there are fewer hedge funds invested in it now, some believe that might mean disengaging from shorting, but short-side volume argues otherwise.

• I mentioned the other day I didn't like how CEO Dr. Ji referenced CoviStix as an EUA for later this Quarter 'hopefully', and still wonder if he relied on a similar antigen EUA at another company they 'intended' to do together.

• However, 'actual' sales in Mexico or a Brazilian or Canadian EUA would be a stabilizing factor for now, so while stunned at the power of shorts in this stock (ongoing for awhile, even tried identifying them).

• Sorrento had no substantive news with 3 presentations last week, really need 'successful clinical trials', approvals and then revenue sufficient to prove shorts wrong, they're gearing-up for that, Dr. Ji says 800 employees now, however serious investors (not speculators) are holding-out for the actual developments, not conjecture on the part of the CEO (it's a box he put himself into over a year ago, it's why he needs results for credibility).

• Recently I've highlighted AEHR Test Systems (AEHR), which we're long at from a lower level this Summer (around 5-6), I mentioned that new members or those desiring to add a bit more, might consider doing so on a break of 12 as that would (barely) fill a gap on the way up and be the best case for an immediate low, we got into the high 11's this morning, finishing around 13, insufficient evidence to say it couldn't work lower after bouncing.

• I'd like to emphasize there was a thought last week of 'insider selling' as this respected 'testing' company had it's best Quarter ever and potential in the looming (but not yet really booming) EV space, not to mention others as far as customers for their Silicon Carbide special test machines too.

• It's the favorable future that had me thinking not much insider selling and probably an effort to hold, you'd need a move over 14.50 to breakout from the short-term declining-tops pattern, eventually of course over 16.80, it's a speculative stock in a sense, because it's volatile and the industry it's in is volatile, and some of that might depend on what happens with..Taiwan.

• Semiconductors (SMH) depend greatly on Taiwan capacity, Intel's new fab is yet completed, and China is building a new Silicon Carbide fab too, so future contracts will depend how other customers do (perhaps Apple too), with Apple there's a different issue as we learn more about 'departed' senior engineers who worked on the M1 and soon to be M1X or M2 processors.

• If China is indeed preparing to attack Taiwan 'now' rather than in years to come as most strategists fear, why would they wait for stronger alliances to be established (?), such as with Australia and Japan, hence concern.

• What's pretty clear is China's near-continuous probing of Taiwan's ADIZ is a strategic as well as economic threat, again... semiconductors... if that happens, the market crashes for a bit flat-out, but dare China contemplate it (unless their Commie Generals are in-charge), given their own economy is almost entirely dependent on manufacturing.. everything... using chips.

• Oil is very strong (OIL), and as I said last week, that's rewarding and great, but it is somewhat contrived by politics, and by Russia and OPEC collusion to keep prices up, Oil over 80-90 is an inflationary signal beyond stability, so it will not be a bullish factor as it has been (remember our main reason as relates to the market is that it helped 'mask' ongoing selling elsewhere).

• Pressure by Washington for Saudis to sell us more Oil is unseemly, as we must remain energy independent, and not send more money to the OPEC countries who then buy arms with what they don't lavish on themselves.

• As for the market, expect S&P (SPX) and Nasdaq (NDX) etc. to washout further Tuesday, with a temporary turnaround, some markets like Hong Kong are closed.

One thing on COVID: decline in efficacy for COVID infection by vaccines is most likely due to 'waning', not caused by delta or other variants escaping vaccine protection, Pfizer (PFE) chief medical officer for vaccines Dr. Luis Jodar said today. It is notable that aside technicals, COVID still plays a roll in this market.

Should it be determined that we do not get through the winter without a really inconvenient series of shots, the market overall won't like that. Aside that, it's pretty clear how this evolves to an end of pandemic (the virus is unfortunately going to be part of life for the foreseeable future in annual shots or similar).. in the year year or two. So it's highly speculative, but clearly whoever does best with shots, with pills, with nose drops/sprays or monoclonal antibody low-dose treatments, will prosper and those that don't, won't. The market play in all the areas involved will continue volatile, and that's sort of why I disdain biotech at the same time realize the moves (up 'and' down) they have and will have.

Qualcomm (QCOM)

In-sum: 

A bear trend developed under-cover of distribution for months, during which there was little upside potential, and plenty of downside risk. Bounces, periodically will occur, and we may or may not exhaust the downside with the classic selling climax. This being a 'mega-cap bear market' is close to classic arguments of the Generals now retreating to join the troops in trenches.

Climaxes normally occur when the broader market had been higher together, as of course this one was not. Energy/Oil was the about the only good area in today's action. The higher valuation stocks were and are vulnerable, but it's a 'process', so cratering gets interspersed with bounces, so keep that in-mind.

Risk gets less as stocks get cheaper, and weeks (even months) provided for building cash or buying power. And remember this is partially tax-related for a nailing down of long-term gains in the mega-cap stocks. Next we'll evolve to a decent entry point on a rotational basis for stocks, sort of the inverse of what we saw as the S&P and NDX did their near-solo-walks before. It's a process, and this one likely has more to go, after trying a crucial bounce. Geopolitical, and domestic political, risks loom as ongoing considerations as well.

It's premature to look for a general turnaround in technology when assessing risk over the weeks ahead. We'll get there, but for now perhaps just a bounce. This isn't a time to be in-love with anything, and there are stocks that will sure do better than others, but that's usually in special situations performing better, or worse, and delivering or not delivering the goals their CEO's had outlined.