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Joe Fahmy from joefahmy.com and Zor Capital joined us to talk momentum and the lack of thereof.
Last week started with rotation into the so-called back-to-normal (from Covid) stocks like leisure, airlines, hotels, oil & gas, and financials. While those recovery industries were rising, interest rates were quickly accelerating putting downward pressure on tech stocks. Something broke on Thursday and the entire market started to pull back. QQQ closed below its 50-day moving average. SPY closed below its 20-day moving average. Momentum stocks as measured by the ETFs – MTUM and ARKK, had their worst performance since September-October of last year. The market is currently in a correction mode.
There are two types of market correction:
- Sector rotation – the indexes remain relatively unscathed in move in a wide sideways range while money constantly rotates from one group of sectors to another. This is the most common type of correction – rotational consolidation. Basically, a stock picker’s market.
- High-correlation pullback which brings down most stocks – the price action last Thursday was a good example of this. Most breakouts are faded or find very little follow-through during this market environment. Short ideas work better but they often require going through a lot more volatility, using wider stops, or selling the rips to declining 5, 10, 20-day moving averages in anticipation of another leg lower.
I believe this is a garden variety pullback that will eventually end up being another buying opportunity but while it lasts it can chop our account if we are too active. Corrections are good for future returns. Market leaders build new bases during corrections. What’s important is to protect our capital and confidence by not over-trading or oversizing any new ideas. Cash can also be a valuable position.
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Disclaimer: Everything I share is for educational and informational purposes only and it should not be considered financial advice.