Is This Bounce Sustainable for Growth Stocks?
The Growth Speculator | Sep 01, 2023 02:23AM ET
After the NASDAQ Composite has sold off 8.8% since July 19th, we’ve witnessed a marked bounce over the last 10 sessions of 7%.
However, as much as volume has been above-average and rising in the decline, volume has been muted and below-average in the bounce, signaling lack of demand. In fact, 8 out of the last 25 trading sessions have shown outright or masked selling:
The NASDAQ is the most relevant index to look at in this context, because its main constituents (the ‘MegaCap-8’) have been the main driver of the 2023 stock market rally.
The S&P 500, similarly biased to the mega-caps due to its extreme cap-weighting, shows a similar dynamic, though less pronounced because of its composition of various cyclical stocks (financials, resource, etc):
If we widen out our prism and look at the mid- and small-cap space, specifically the growth stock space (to which all the MegaCap-8, a.k.a. The Magnificent 7 stocks belong), we see the same over and over, as for example shown by the iShares Russell 2000 Growth ETF (NYSE:IWO):
In fact, this risk-on segment of the market has never confirmed the rally staged by the popular indices NASDAQ & S&P 500. It has not even successfully staged a reversal of its long-term downtrend starting end of 2021:
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Looking at stocks making new price Highs (thereby a proxy for buying demand), we see that the NHNL gauge (measuring issues at new Highs - issues at new Lows) implies that “growth” issues from the NASDAQ exchange never really ignited in the whole rally of 2023 (in fact there is a bearish divergence between the February and August peaks), while the more Cyclicals-dominated NYSE issues have been dominating.
Given that NASDAQ-type stocks had been leading this rally, this is concerning as it reinforces the very thin breadth of this rally.
The current bounce shows a similar, though much more degraded dynamic:
In summary:
- It appears the current bounce is largely driven by lackluster dip-buying and not committed accumulation by institutional money
- There is continued risk-off sentiment observable in the leading parts of the market
- A general lack of liquid stocks with strong fundamentals entering price exploration into new High price ground is another red flag
Based on these indications, we might see a continued bounce, but odds for a risk-on growth-driven rally are low.
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