Momentum Monday – Digesting Gains

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The current consensus is that this is just a bear market bounce. It makes common sense. All major indexes are still below their declining 50 and 200-day moving average. If everyone is expecting the current rally to eventually fizzle, everyone is trading with one foot out of the door – taking quick profits and limiting overall market exposure. Such behavior naturally leads to more intra-day and intra-week volatility, some might call it choppiness. It’s not an easy tape trade but there are certainly more bullish arguments compared to two weeks or so ago.

The bullish arguments

The positive market reaction to bad news continues – Microsoft guided lower and the tech sector rallied 3% on that day. We are seeing mostly upside market reactions to earnings – this is a big change in sentiment compared to just a few weeks earlier when almost any earnings report was greeted with a swift selloff.

There is a rotation in strength and a decrease in correlations – it seems a different sector is leading every day. Energy, especially oil and gas, has remained the strongest overall sector, but others are starting to wake up too. ARKK and IPO were up 8% on Thursday. Biotech ETF, XBI was up 3.5% on Friday while the Nasdaq 100 lost 2.6% on that same day. The trash is rising from the bottom. I don’t know if this is a sign of improving risk appetite or just a powerful short squeeze before another selling wave. 

The bearish arguments

The Fed remains steady on its quantitative tightening course which will be a major headwind for most stocks. Probably the first test of declining 50 and 200dma will be sold.

Oil stocks have been the clear winners this year. One industry’s rising revenue is often other industries rising costs. This applies with full force here. Higher energy costs basically guarantee sustained inflation and lower consumer spending. The question is how much of that has already been discounted by the market.

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