Momentum Monday – Rising Inflation Expectations

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The first week of the new year was all about the market discounting rising inflation expectations. Interest rates spiked and with them, many financials, oil, basic materials, metals, and industrial stocks galloped higher -. In the meantime, most of the so-called new-economy sectors were under notable pressure – software, semis, biotech.

The Nasdaq 100 lost 4.5% in the first week of 2022. The small-caps Russell 2k lowest almost 3%, the better diversified large-cap S&P 500 shed 1.9%. There are obvious distribution signs on the tape. Big intraday sell-offs are followed by shallow bounces. The short-term trend is lower. The only bullish argument in this tape is the sector rotation into old-economy sectors. Rotational corrections rarely lead to big pullbacks for too long. I am not saying to blindly buy the dip here. That would be irresponsible. I am saying to have an open mind that the new earnings season that starts in less than a couple of weeks might lead to another bounce. For us, it doesn’t matter too much. We will find good risk/reward trades in any market environment.  Even last week, when most of the market was under pressure, there were plenty of opportunities on the long side every single day.

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