Momentum Monday – Discounting Recession

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In a bear market, eventually, every sector gets under pressure. Up until last week, oil and gas stocks were enjoying one of their best years. And then, they were hit hard. The Fed raised the base interest rate by 75bps and declared that its goal is to bring down inflation to under 2%. All of a sudden, the market’s main worry was not stagflation (high inflation and very low growth) but a recession (negative growth). The oil & gas sector ETF is now down 24% from its 52-week highs. Despite the drop last week, most oil & gas stocks are still in a long-term uptrend and many might have a short-term bounce near their year-to-date volume-weighted average price.

There are not many stocks left that are still above their 50 and 200-day moving averages. Lately, we have seen select Chinese ADRs and biotechs push against the mainstream weakness but overall there are just a few decent-looking long setups and none of them are really very exciting. The silver lining is that even the scariest and longest bear markets experience powerful counter-trend rallies from time to time. Market breadth has become so weak that we might be close to one. SPY is about 5-7% from major potential support near 350–340. If that level doesn’t hold, we might see a major panic selling and acceleration lower. The faster, the better. It’s always preferable to rip the bandaid quickly than to be tortured for many months by choppy down-trending price action. I am not in a rush to be aggressive on the long side but if I see signs of a bounce, I will try some long exposure. Typically, bear market bounces characterize by very high correlations, so I might just as well participate with an ETF like SPY, UPRO, QQQ, or TQQQ.

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