Momentum Monday – Inflation in Everything

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