Momentum Monday – More Distribution and New Lows

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The S& P 500 finally tested its summer lows and actually closed at new year-to-date lows at 357. The next levels of potential support are 350 and 340. Typically, nothing goes down in a straight line. It is normal to see bounces along the way. 

There will be an emergency FOMC meeting on Monday. I doubt it is because they want to raise rates sooner. It has come to a point when federal officials might start worrying more about financial stability than inflation. Decent odds that they might say something that will spark a short-term rally. Probably the market is expecting that and it might gap up on Monday. Or not. The market might also be too scared to bid up before the actual FOMC statement is released. There are rumors going around that a major international bank is on the brink of going under.

The trading world continues to revolve around macro. Every equity trader is keeping an eye on the US Dollar and interest rates. The recent moves in forex and bond markets have been of historic proportions. Pension funds in England were close to going under before the Bank of England stepped up to buy $65 Billion of gilts. I don’t see how all those increases in interest rates around the world don’t lead to more QE at some point next year or earlier. No wonder gold and Bitcoin have stabilized lately. When the US Dollar finally starts to really pull back, those assets are likely to outperform. I am not saying buy them now. Just keep a close eye on them and look for a setup.

In the midst of all the macro dislocations and relentless selling last week, one sector stood out. Biotech is still in a long-term downtrend and if there’s forced liquidation, can go lower from here. And yet, the few stocks that are showing up on the 52-week high list, gap up on good news, and high volume are from that sector. When this bear market subsides, biotech is shaping up to be among the leaders: APLS, SNDX, RXDX, CPRX, VRNA, REGN, PTCT, SRPT, RVNC, CYTK, AXSM, KDNY, VRTX, AMLX, PLRX, etc.

I don’t know at what stage of the bear market we are. We could be in the middle, we could be towards the end. The former is more likely. We are already seeing major companies like Nike down 54% from their 52-week highs made in November of 2021. This is a bigger correction than the one they had during the Great Recession in 2008/2009. Obviously, valuations are very different. Many companies are still trading at high P/E multiple and the one thing that characterizes a bear market is P/E multiple contractions, especially in the current environment of rising interest rates. What I am saying is don’t buy a stock blindly just because it is down 50%, 60%, or 80%. It can go lower and scare you out or it can go sideways for a very long time and wear you out. You don’t need to catch the exact bottom in order to participate in a bear market rally or new bull market. You can wait for a stock or a major index to go back above its 20-day exponential moving average and its 10dEMA to be above its 20dEMA before you participate and you can still get a nice chunk of the move at a lot lower risk.

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