Month: April 2022

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Correlations between stocks went up significantly in the past few days. Tech stocks are not the only ones under pressure. They have been joined by basic materials. Everything is getting sold; even the defensive sectors like consumer staples and utilities. I see two main reasons behind the recent weakness:

1. The market is pricing in an aggressive interest rate hike. Stocks went down significantly in the two weeks ahead of the FOMC meetings earlier in the year – Jan 25-26 and March 15-16. The next meeting is May 3-4th. It seems we are seeing something identical right now. Stocks bounced after the FOMC meeting the past two times. 
2. After the Netflix earnings fiasco and lower guidance, the market is worried that other companies will report similar issues and it is pricing them in advance just in case. Remember that financial markets move based on sentiment and expectations in the short term. They often panic before they ask questions. The silver lining is that the worst might be discounted ahead and see more constructive price action after the majority of earnings reports are behind us.

Obviously, many basic material stocks are still in an uptrend. They might still find some support near their rising 50 and 100-day moving averages. It usually takes some time for an uptrend to turn into a downtrend. There is a period of clear distribution and choppiness in-between. Keep in mind that the first half of 2008 was somewhat similar to 2022. Basic materials were strong while the rest of the market was weak. At some point, even commodity-related stocks started to break down and then the entire market accelerated lower. Pay attention when correlations go to 1.0. It’s a sign of widespread liquidation. 

What’s next? We are in the midst of earnings season. The next three weeks will be heavy in reporting. What I have noticed so far is that stronger than expected earnings reports are getting little to no market love – the upside gaps are smaller and they are often getting faded. See Tesla (TSLA) or United Airlines (UAL) for example. Downside earnings gaps on the other side are following through. Look at ISRG, VZ, HCA from last Friday. They all gapped down right below previous support and quickly sliced lower from there. With the risk of saying the obvious, upside earnings gaps do a lot better during bullish markets and downside earnings gaps find better tractions during bearish markets. 

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The 10-year US Treasuries yield is not far from reaching 3%. Less than two years ago, it was 0.5%. It should not be a big surprise that most tech stocks have been under heavy pressure. The Nasdaq 100 (QQQ) fell to 340 last week. Its March lows are only 20-points away. If you think that it’s impossible to test them, keep in mind that the semiconductors ETF – SMH, just did exactly that. 

The earnings season has just begun. Big Tech will report in the next three weeks. As always, some will show more resilience to the current driving economic forces and report better than expected results. This is why I believe that choppy, range-bound action is more likely than an accelerated selloff in tech.

The current leaders are still concentrated in the energy, metals, and agricultural space – oil, gas, coal, uranium, gold, steel, potash, etc. Most of them have started a new leg up in the past couple of weeks. Don’t forget that even momentum leaders need to pull back and consolidate occasionally. Don’t chase stocks that are up several days in a row because they don’t offer good risk-to-reward. If you have to endure a 10% pullback to make a 10% potential return, the setup is too sloppy. 

There’s another theme that is starting to emerge again – travel stocks are showing relative strength. A few weeks ago Carnival Cruises (CCL) said they are seeing record bookings. Last week, Delta Airlines was very optimistic about booming demand despite higher fuel costs. As a result, other travel stocks are perking up – hotels Marriott (MAR) and Hilton (HLT) are near all-time highs. The stocks of AirBnB (ABNB) and car rental companies Hertz (HTZ) and Avis (CAR) are also looking constructively. People want to travel this year as much as possible no matter what and it is shown in the charts of the relative companies. We don’t know if this group of stocks can continue to push higher in the face of additional market weakness but their relative strength is something to pay attention to. They are likely to be among the leaders when the indexes bounce again.

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Most of the first quarter was all about rising interest rates and inflation expectations. As a result, oil & gas, coal, uranium, metal, potash, and other basic material stocks have outperformed substantially year-to-date. There is a new major market theme that emerged in the past couple of weeks. Now, the market is not worried only about inflation. It has begun to discount a potential recession later in the year. Look at the best performers the past two weeks – so many came from defensive sectors like healthcare, utilities, REITs, and consumer staples (discount stores, auto parts stores, farms). 

186 stocks went down 10% or more last week. Tech stocks (semis, cloud, Internet), financials and US Treasuries were hit the worst. Anything cyclical and related to growth is under pressure. Tech is looking heavy and on the brink of breaking down. QQQ managed to finish right on its 50dma. If it cannot bounce above 353 on Monday, it is likely to test 340 soon. 

34 stocks went up 10% or more for the week. The winners – oil & gas names, discount stores, uranium, potash stocks – typical stagflation move. The next earnings season and CPI report are right around the corner. Maybe, the market has begun to price strong earnings in energy stocks and inflation that is likely to remain elevated for the foreseeable future. If the same trends remain, we should see a continuation higher in many of the energy names that started to break out last week

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