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The silver lining from last week is that a relatively small bounce in the indexes was enough for many momentum stocks to break out. They spent the previous three weeks consolidating and building new bases above their 20 or 50-day moving averages. As soon as the pressure from the indexes was lifted, they rallied strong – clean energy and biotech are certainly standing out as sector leaders but there are many others that are also acting constructively.
What was the reason behind the rally in the indexes? The US dollar pulled back slightly while interest rates stopped going up. Sentiment and market breadth had also reached extreme conditions. Everyone was overly bearish and markets tend to go in the opposite direction of the majority. We saw multiple rotations throughout the week. It started with a gap up in energy, then the momentum leaders from biotech and clean tech took the baton. And finally, the laggards shone on Friday – cloud, and anything highly shorted.
I still believe this is a bear market bounce but those bounces can be viscous as we saw earlier in the summer. If this bear market has another leg lower, the current bounce is setting up better risk/reward entries for new shorts or put options. If I see a bearish reversal candle, I’ll probably dabble on the short side via some Put options. By a reversal candle, I mean either an intraday rally that finished near the lows of the daily range and forms a long upside wick or a big red candle that closes below the previous day’s low.
As bearish as the macro scene is, there’s no sign of fear or forced liquidation among most individual stocks. Either the market participants should be more scared than they are or the macro threats have been mostly priced in as of now. It’s not an easy call. I can see both scenarios playing out. I will remain flexible and ready to switch between bullish and bearish based on price action. There’s no place for permabulls or permabears in the current tape. You are either nimble or you are better off being out.
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