Momentum Monday – The Market Is Still Choppy

MarketSmith powers the charts in this video

What a crazy week! It wasn’t a big surprise that both PPI and CPI came above estimates on both year-over-year and month-over-month basis. What was somewhat unexpected was the initial market reaction. Most stocks sold off hard in the pre-market on Thursday when the CPI news broke out. The second the market opened, all we saw was relentless dip buying all day. What started as short sellers taking some profits after the indexes went down multiple days in a row and gapped down; ended up with a full-scale short squeeze that brought SPY and QQQ back to their declining 20-day EMA. You know what happened afterward – quick and complete rejection on Friday. 

All and all, we saw more distribution last week. 155 stocks went down more than 10% last week. More distribution. Interest rates keep perking up which is a big headwind for tech. 22 went up more than 10%. The minimum price requirement for this universe is $10, the minimum average daily volume is 300k. Tech was hit the hardest. Semis, cloud, internet, and mega-cap tech stocks had a new YTD low on a weekly closing basis. 

The new earnings season has just begun. Expectations are already low as most stocks have been declining ahead of earnings season. This doesn’t mean that valuations are still low. Another 10-15% flush to the pre-Covid high seems like a more reasonable base for a potential bear market rally. If SPY loses last week’s lows around 348, it is quickly going down to 340. If 340 doesn’t act as major support, the next level is 320. 

The silver lining for the bulls: 

The silver is very grey and it is not shiny at all but here it goes. Last week, we saw some positive market reactions to the first reported earnings. Dominos Pizza (DPZ) and  JPMorgan (JPM) missed estimates and still went up after their earnings. Can we see something similar for the rest of the earnings season? This was the story of the last earnings season. We will keep a close eye. Every earnings season has its pattern – be it a market reaction to earnings surprises or misses, be it notable strength or weakness in a certain industry. Finding out that pattern early on is a big source of edge for the remainder of the season.

There is still a chance for the so-called follow-through day next week if the indexes don’t go below their lows from last week and rally more than 1% on volume higher than the volume of the previous day. The problem is that there’s nothing to buy. There are almost no stocks setting up above their 50-day moving averages. For me, the availability of good stock setups overwrites any follow-trough day in the indexes. Besides, correlations remain high. Most stocks move in tandem, up and down, regardless of individual characteristics. Why would you pick an individual stock in an environment like this? If you have/want to buy something on a follow-through day, using an ETF is a viable substitute. If you want more volatility, you can pick up a triple-leveraged ETF – SPXL, TQQQ, LABU, SOXL, etc. 

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