Momentum Monday – Relief Rally

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The market is better at predicting the news than the news is at predicting the market. Financial markets typically look 6-9 months ahead and try to anticipate what could happen. They are currently betting that the Fed’s aggressive tightening policy is going to send the economy into recession and the Fed will have to stop hiking sooner than previously expected. As result inflation expectations are tapering and we saw a major mean reversion last week. The worst-hit groups year-to-date outperformed significantly last week – ARKK went up 18%, the cloud ETF – WCLD, went up 15%, biotech XBI went up 14%. In the meantime, the best performing sector year-to-date – oil & gas (XOP), lost 6%, tested its 200-day moving average and it is now down almost 30% from its annual highs. 

The odds are that this is just another bear market bounce that will eventually be faded again. It is really hard to know how long it can last. The conventional wisdom says that the declining 50 and 200-day moving averages are likely to be major areas of resistance for SPY and QQQ but markets often overshoot. In the meantime, there’s nothing wrong with being nimble and playing the relief rally. If the bounce has legs, we should see more stocks setting up and offering decent risk/reward entry points. As of right now, the number of good long setups is still relatively small.

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