Momentum Monday – Bearish Market Environment

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Most stocks are in a bear market. There has been no follow-through on earnings breakouts this season. Most upside gaps are either faded immediately or lead to exactly one day of upside action before they get slammed. On the other side, there has been plenty of follow-through on earnings breakdowns – see PYPL, FB, for example. 

Nothing goes straight down or up. Occasionally, bear markets have viscous short-term rallies just so they can scare the shorts out of their positions and trick new longs in. When the bear lays out honey, it is usually a trap. The tiny low-volume bounces just create better risk/reward short opportunities. The bounce we saw in the first half of February was followed by more selling. In fact, many cloud and Internet stocks have started another leg lower. 

To top it off, there is a war lingering in the air. I don’t know how much of it has already been discounted but markets tend to overshoot. Scared people tend to panic and panic leads to liquidations and forced selling. No wonder buyers are with one foot out the door and have to conviction. And this won’t change until the indexes make a higher high which currently means 460 for SPY. In rising markets, it pays to hold longer. During corrective, choppy markets is important to be nimble and take profits quickly on both long and short positions because they tend to disappear quickly. If you cannot adjust to this new reality, it is better just to stay on the sidelines and wait out the storm.

The main indexes seem headed for a test of their January lows. This means 420 for the S&P 500 (SPY), 334 for the Nasdaq 100 (QQQ), 190 for Russell 2000 (IWM). They don’t have to get there in a straight line. There could be another bounce along the way.

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