Month: March 2022

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This has been the ongoing theme of 2022 – interest rates continue to rise and they are repricing the entire market. As a result, oil and metal ETFs are up more than 40% year-to-date, financials are flat, the tech sector is down 10%, most software names are down 20%+, homebuilders are down 24% for the same period. The war in Ukraine and the sanctions on Russia have exacerbated the ascent in commodities. One industry’s rising profits has become other industries’ rising costs.

Most stocks have been rising ever since the Fed announced the 25bps increase in interest rates two weeks ago. It seems the market is thinking that the Fed is bluffing about rapid rate hikes. The big question is can tech stocks continue to climb a wall of worry or this is just another bear market bounce? The common-sense answer is that this rally is not sustainable in the face of rising interest rates, major inflation, and supply chain challenges and yet, it is getting stronger and involving more and more stocks. You know what they say about the positive reaction to negative news – there’s nothing more bullish. 

I mostly see bullish setups. Energy, metals, fertilizer stocks are following through higher after a brief pullback to their rising 20 and 50-day moving averages. They are acting like typical momentum stocks. Semiconductors had a major accumulation day last Thursday and most are looking higher – SOXL, NVDA, AMD, QCOM, AVGO, ON, AOSL, etc. Even the meme stocks GME, AMC, and the proverbial dogs, cannabis stocks are waking up. The latter might be more of a major hubris sign, which tends to happen just before a rug pull but it is also clear proof that there’s a rising risk appetite.

I am not saying that I am overly bullish. I continue to be cautious and take frequent short-term profits in this tape. I realize that the correction and the choppiness earlier in the year have impacted my and most market participants’ sentiment. It’s normal to disbelieve this rally and to be ready to sell everything by the first smell of trouble. This is why it is said that rising markets climb a wall of worry. The more important thing here is to not be stubbornly fighting against this rally and remain open-minded to all possibilities no matter how bizarre they might seem.

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Most stocks started to rally ahead of the FOMC meeting and accelerated their ascent afterward. 25 basis points increase in rates is probably viewed as too conservative. The take is clear – there’s is rampaging inflation that is not likely to taper any time soon and the Fed is being overly careful with the interest rates increases. 

The bounce in most stocks last week was statistically significant. The S&P 500 gained more than 1% four days in a row. All cyclical sectors gained. The worst-hit groups went up the most – Europe, China, software, biotech. The odds are that this is just a bear-market bounce but we have to also admit that is normal to distrust any rally after the constant breakout failures and 50-90% drops in so many stocks in the past four months. Trends die hard because sentiment changes slowly – this is why there are so many bounces in uptrends and downside reversals in downtrends. Sentiment follows price action.

I am operating from the view that this is a bear-market rally. I am still participating in it but taking quick profits. If the major indexes can go back over their flat to rising 20, 50, and 200-day moving averages, I will have a good reason to change my mind and tactics and look for longer-term holdings.

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Here’s a Google spreadsheet tracking all closed options and stock ideas shared on my private Twitter stream and emails for subscribers.

Check out my free weekly email to get an idea of the content I share with members.

Disclaimer: Everything I share is for educational and informational purposes only and it should not be considered financial advice.

The charts in this video are powered by MarketSmith

The price action in most stocks last week was basically a selloff on Monday and Friday and a weak bounce attempt in the middle of the week. All major stock indexes are looking vulnerable to further breakdowns. The one thing to keep in mind is that this is a headline-driven market. Any rumor about a ceasefire in Ukraine or the Fed being less hawkish than expected can lead to a massive short-term rally in most stocks and a big decline in oil. Other than that, I can see SPY testing 400 and QQQ testing 300 eventually.

The price leaders remain the same – oil, marine shipping, metals. Clean energy names tried to join them last week but still have much to prove. The solar ETF gained 10% in one day last Tuesday only to give most of it back afterward. It’s still a space I will be keeping a close eye on. It has two major catalysts going for it – high crude oil prices which should make all other energy plays more valuable too. Europe and the U.S. will invest even more heavily in renewables to reduce their dependence on foreign oil. Price setups have to confirm any market theory for me to open a position. 

Let’s keep things in perspective. Over the past decade, we experienced some sizable corrections but they never really lasted more than a couple of months. A whole generation of investors hasn’t really faced a real bear market that lasts multiple months and it is filled with gradual lower highs and lower lows, panic selling followed by panic buying. The silver lining is that a bear market is the best thing that can happen to a trader – not only because it brings much wider price ranges and good opportunities to make money on the short side; not only because it lays down the foundation for 10-20x gains when the recovery begins but mostly because it teaches discipline. If you are not disciplined during a bear market, your account won’t make it for the inevitable bull market that eventually follows.

Try my subscription service which includes a private Twitter feed with option and stock ideas, emails with concise market commentary and actionable swing, intraday, and position trade ideas, the Momentum 40 list of market leaders, and much more. See some of the recent testimonials.

PERFORMANCE

Here’s a Google spreadsheet tracking all closed options and stock ideas shared on my private Twitter stream and emails for subscribers.

Check out my free weekly email to get an idea of the content I share with members.

Disclaimer: Everything I share is for educational and informational purposes only and it should not be considered financial advice.