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The latest CPI readings came at 7.5%; a bit higher than expectations. The market brushed off the initial selloff on the news and we even saw software and biotech stocks leading the bounce which to me was a clear sign that the 100-200 basis points increase in interest rates was probably already discounted. Then Friday’s Ukraine headlines came and the tech was poleaxed while commodity-related groups shone. Oil & gas: XLE, XOP, metals and mining: XME, fertilizers: CF, MOS NTR, SQM; are currently the leading stocks in the market. It’s not ideal when basic materials are rising and tech is in the gutter but we have to work with what the markets provide us. Trends are trends no matter the asset.
Commodities are cyclical. Their outperformance is not from yesterday. It started more than a year ago. It’s anyone’s guess how long the upswing stage is going to last. The narrative and earnings growth is on their side right now. Rising inflation expectations, reopening after Covid, and Russia/Ukraine crisis are driving oil prices. Financial markets always overshoot. Less than two years ago, no one wanted to touch energy stocks. The world was under Covid lockdown and WTI oil even went negative for a brief moment. Fast forward to today, people can’t get enough energy stocks.
Thursday and Friday were big distribution days for the S&P 500 and the Nasdaq 100. Both made lower highs. SPY tested its 50-day moving averages and reversed lower. QQQ tested its 200-day moving average and pulled back. Both seem headed for a test of their January lows. If this happens, I will be watching for bullish divergences. Will fewer stocks make year-to-date new lows if the indexes revisit their lows? This would be a foundation for a more sustainable bounce. The alternative would be another leg lower. If QQQ cannot hold 340, it will probably test 320 which would represent about 20% drawdown. If 320 doesn’t hold, the next level of potential support is 300. Keep in mind that markets rarely go straight down or up. There are usually vicious rallies that interrupt downtrends. The silver lining is that the bigger the correction, the bigger the opportunities afterward.
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