Momentum Monday – Risk Assets Are Getting Repriced

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The Fed has changed its interpretation of inflation and this is wreaking havoc in the high-growth, high-momentum world and a scare in the rest of the stock market. The vast majority of momentum names that tripled and quadrupled last year are in the midst of 30%+ drawdowns. The small-caps index Russell 2k is near the bottom of its range since February while adding multiple distribution days just in the past couple of weeks. The large-caps S&P 500 and the Nasdaq 100 managed to close the week barely above their 50-day moving average but are also looking vulnerable to further downside especially if they lose their Friday’s lows. The main indexes are in a correction mode. The most common-sense strategy for active market participants in this market environment is to either focus on intraday setups or sit on the sidelines with a large cash position. There are still plenty of opportunities for the nimble. In fact, corrective markets are active traders’ paradise because of the elevated volatility. Granted intraday trading is not for everyone and there is nothing wrong in taking the occasional mental break from the market and coming back recharged and ready to ride the next market rally aggressively. 

In the meantime, there are more Covid-related restrictions around the world as the Omicron mutation is spreading quickly. We still don’t know enough about its death rate and the current vaccines’ protection rate against it. It seems at this point the market is more worried about Fed’s tightening policy than the virus. The narrative has changed. Covid used to be favorable for tech stocks because it meant more liquidity from the Fed. Lately, a new Covid threat means that the Fed will worry about inflation due to supply chain issues. This is why the same playbook from last year is not working now.

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