Momentum Monday – Choppy Market Looking for Direction

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What really happened last week from a big picture perspective – anything high-growth and cyclical that had shown even remote relative strength finally caved in – the mega caps QQQ, semiconductors SMH, homebuilders XHB, financials XLF. It might seem dramatic to talk about a market correction with the S&P500 so close to its all-time highs and still above its 50-day moving average but there has been some serious damage under the surface. Many of last year’s momentum leaders are down 40-50% from their highs. There is a new group of stocks getting hit every week while the most-oversold sectors are having big 1-2-day short-covering rallies. All of this has created extreme volatility and choppiness which require all traders to be extra nimble or just step aside a wait it out.

The Fed wants to accelerate tapering and plans to raise interest rates three times next year in order to fight inflation. Initially, the market read this as complacency and underreaction. All stocks had a major rally on Wednesday afternoon. Most were given back on the following day. Friday was a quadruple option expirations day and we had some major mean reversions. The worst-hit groups in the past few weeks had a sizable bounce – biotech and high-growth, high-multiples software stocks. In the meantime, financials, homebuilders, mega-caps, and semis showed relative weakness. At least this market is not boring and riddled with high correlations. 

SPY, QQQ, and SMH are now looking vulnerable to further downside if they lose their lows from Friday. The odds are that we will see more choppiness next week.

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