There’s always a bull market somewhere (bear market edition)
Picture Credit: Somewhere on crypto twitter!
By now it shouldn’t come as a surprise that we find ourselves in a market that is packed with contradictions. On one hand, our base case remains that we are in an enduring bear market, and that calls for a bottom and a prompt resumption of “up only” are very much premature. On the other, as we often remind ourselves, we are students of price action and have great respect for where price in the market wants to go.
So notwithstanding our fundamentally-driven bearish view, we’d be the first to admit that there are segments of the market that are not only recovering, but are staging a convincing exit from their bear market trends.
But as expected, the leaders of this leg up were not the leaders of the previous decade-long bull market. Sure, some of the usual suspects at index level are back in vogue, but many of the prior superstars are nowhere to be found.
Of greatest interest to us is the tech space, not because we believe that there’s a chance tech can unleash another multi-generational bull market, but because of the complete opposite. The divergence between individual stocks within the general basket of “tech” has never been more pronounced, certainly at an extent we haven’t seen in more than a decade.
More than a year ago, we wrote a piece about finding dispersion in the crypto markets, and we’ve always looked at crypto as the instruments that were farthest out on the risky/speculative spectrum, so it’s perhaps not so surprising that this dispersion has in the fullness of time come to the world of stocks.
The criteria for what goes up and what doesn’t isn’t a surprise either: fundamentals seem to be back in town – or should we say, people who believe other people will buy fundamentals.
Not built the same
Zooming out from tech for a moment, it is instructive to see where the REAL leader of the rally in the market is:
Leading the pack is the Dow, which has not only posted a 20% bounce from the lows, but has also convincingly extricated itself from its downtrend.
“But didn’t the S&P and Nasdaq do the same?”, one may ask. Indeed they have, but to a very different extent:
The difference is clear: where the S&P 500 and Nasdaq remain in their general downtrends (until proven otherwise by price), the Dow has quite simply walked out of it.
Explaining the difference isn’t difficult either: take a look at the 30 equal-weighted components of the Dow and there’s one thing that stands out, which is how boring, industrial and unsexy these businesses are. Sure, Apple and Salesforce are included in the Dow 30, alongside the likes of Walmart, GS, JPM, Amex, 3M, Walgreens and Coca-cola, to name a few. Put differently, these are PROPER businesses as they used to be - profitable and cash-generative.
Compare that to the mix in the S&P and the Nasdaq, where a much broader bunch of companies are included, purely by virtue of market cap. Sure, one could argue that the DJIA only containing 30 large companies weighted by price makes it a poor representation of the market as opposed to a broad index like the S&P 500 – that may be true, but it also goes to say that a specific type of company is seeing their stock go up, while others are being left behind.
It really isn’t a hard puzzle to solve for: companies with profits or at least tangible probability of attaining profits in the near term are being re-rated, while speculative, long-dated promises of break-evens which are bordering on no longer being a going concern are being looked upon with a scepticism.
That dispersion is exhibited even between companies in similar lines of business, but with very different fundamentals. Consider Latam e-commerce/fintech giant MercadoLibre vs African e-commerce company Jumia:
Both were aggressively bid up post Covid, but one story began to unravel much earlier, and the size of the drawdowns in % terms aren’t even comparable (Jumia price on the LHS, MELI price on the RHS). The difference: one is profitable and a market leader, the other still has to fight for its survival.
The nuance we’re trying to convey here is much more subtle than what has gone down vs what hasn’t. It’s about what has a chance to stage a comeback, and what remains in the no-go zone. Especially in tech, almost all valuations have been marked down – cheap is a good start, but it’s no guarantee that things can’t get cheaper.
The distinction between “good” tech and “rubbish” tech is very quickly being made, and that distinction – ostensibly based on prospects for profit and indeed time to profit – is showing up in price performance.
Quickly, on crypto
Coinciding with Thanksgiving is none other than the endless supply of self-deprecating jokes dreading the annual face-off with relatives to whom many crypto fans shilled crypto ideas last year, just before the market topped out.
Unfortunate and brutal as these may be, the reality is that there is little reason to expect any respite: in most cases, crypto charts (aside from those that have imploded by association with FTX) bear great resemblance to “rubbish” tech. There’s no sustained rally, at least not yet, and sure there’s the odd bounce here and there, but the question is: do any of these tokens have anything to offer in terms of certainty, or even a whiff, of cash flow at any point in the near-enough future to matter?
The problem is that in most cases the answer is no, and further weighing the whole space down is the spectre of more deleveraging from skeletons in the closet and/or tighter regulations. Sure, there are opportunities on the short side, but most people would rather be long.
And perhaps a time will come when the long play is back on the table, although perhaps, as it is with stocks, with a lot more dispersion.
Around the corner
To be clear, this is simply what we observe at this point in time, and around these observations we can posit a hypothesis for what might be occupying the thoughts of the average market participant at this time. What we’re definitely not doing is trying to call the end of the bear market, although as mentioned above, there are some stocks that are eyeing a retake of their all-time-highs again even in these uncertain markets.
Whether this all goes to the dumps over the coming months with a new violent bear market – we don’t know. But what we do know is that a specific subset of the market has broken its primary trend now and has taken the lead on the way up.
It just goes to show that there really always is a bull market somewhere.