Momentum Monday – Defensive Stocks are Leading

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If we judge by the most constructive charts currently, we can say that the market is pricing a potential recession at some point this year. Look at what is setting up near the 52-week highs list: consumer staples like General Mills (GIS), Dollar General (DG), Post Holdings (POST), Campbel Soup (CPB); auto parts chain Autozone (AZO); online education Stride (LRN); health insurance Humana (HUM); big pharma Merk (MRK) and Eli Lilly (LLY), etc. These are not the type of stocks that lead at the beginning of a sustainable bull run. We can still trade them and profit from them but they are slow movers so don’t expect a lot of volatility in those. 

Biotech is another group showing relative strength in the past few weeks. XBI topped in February of 2021 and it fell 65% in the following 15 months. You have to go all the way to 2000-2002 to see so much destruction in so little time in a sector. The most recent drop overshadows even the Great Recession of 2007-2008. Over the past few weeks, XBI went up above its 20 and 50dma and successfully bounced off them. The next big level of potential resistance is 80. If that is cleared and then successfully tested, XBI will probably reach its 200dma near 95-98. It’s a bear market rally but those can be furious. 

Chinese stocks have been in the doghouse for a long time. The Chinese Tech ETF – KWEB topped in February of 2021 and then it fell 80% in the following 13 months. KWEB seemed to have bottomed in March of 2022 (as of right now) and since then it has made several higher lows, slowly establishing itself above its rising 20 and 50-day moving averages. KWEB is still below its 200-day moving average and the recent push higher can be considered just a bear market rally. And yet, quite a few Chinese ADRs have been acting constructively as of late: breaking out, bouncing off their rising 20-day moving averages. Some names that fit that criteria: PDD, BABA, BIDU, JKS, YUMC, HTHT, EDU, JD, ATHM, LI, NIO, etc.

In the meantime, Micron missed earnings and gave a huge cut in guidance bringing down the entire semiconductor index with it. SMH closed at new 52-week lows on Friday –  another sign that the market is currently more worried about a recession than inflation and supply chain constraints. The market is not always correct but it’s rarely a good idea to argue with it. 

Happy 4th of July Weekend!

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