Momentum Monday – Positive Market Reaction to Bad News Is Bullish

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We finally saw the bear market bounce many were waiting for. It started with a bullish momentum divergence the previous Friday and it followed with a widespread buying after the Fed minutes were released on Wednesday. The minutes didn’t say anything new – most board members are for multiple 50bps increases in interest rates and yet the stock market bounced hard. Something has shifted in sentiment and all of a sudden we saw positive market reactions to bad earnings reports. It’s anyone’s guess how long it is going to last. We will dance until the music is playing. The next major technical resistance levels are 420-430 for SPY, 320-330 for QQQ, 80 for the biotech ETF – XBI, 190-200 for the small caps Russell 2k (IWM).

The current earnings season is coming to a conclusion. The latest themes:

  1. The resetting of expectations continues with full force, especially in the tech sector. Companies are either missing estimates, guiding lower, or both. The silver lining is they have managed to lower the market expectations so it’ll be easier to surprise in the future.
  2. The impact of Inflation is not distributed evenly as of now. While Walmart and Target said that costs have gone up more than expected and their customers have changed their purchasing habits due to higher inflation, Nordstrom and Williams-Sonoma pointed out that their clients are not having those issues yet. It only makes sense. Higher inflation typically hits first people with less income. 
  3. The most heavily shorted stocks are missing estimates, gapping lower, and then squeezing higher. We saw that in companies from various sectors – USPS, DKS, BROS, etc. This is a normal part of the market structure. Every share that has ever been sold short will have to be bought back at some point. High short interest can be a source of solid future demand. What better time to proactively cover a short position than after a prolonged downtrend followed by a big gap down on weak earnings? Granted, many of them will probably set up again on the short side in the near future.

In the meantime, anything related to energy continues to be among the price leaders. Oil &  gas stocks went up about 20% across the board last week as natural gas hit 12-year highs. Lithium stocks have also been on fire as it is needed in the clean-energy space – LTHM, ALB, LAC, SQM.

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