Momentum Monday – Markets Are Counterintuitive

MarketSmith powers the charts in this video

Financial markets can be counterintuitive quite often. When sentiment becomes too bullish or too bearish, they tend to move in the opposite direction regardless of the news. When a trend has too many disbelievers and doubters, that trend often continues a lot longer and further than commonly anticipated. 

If someone told you three months ago that Chinese ADRs will be the market leaders in early 2023, you would have probably thought they are crazy. Most Chinese stocks were in a free fall three months ago and no one wanted to touch them. Many still don’t. Then, one Monday in October they had a big gap-down day which ended up being the bottom. Most of those stocks have doubled since then. In the past few weeks, I highlighted the notable relative strength in China multiple times and acknowledged that their central bank is the only one that is stimulating the economy. Everyone else is raising interest rates and tightening monetary conditions. Despite that observation, I was reluctant to get involved. My thinking was there is too much political risk and this is probably just another short-term bear market rally. All of those arguments can still be true but I have to admit that the price action has been predominantly bullish. Volume action is showing accumulation as well. Sometimes the market is seeing something six to twelve months down the road that most of us don’t see. Sometimes, it ends up being right, and sometimes -terribly wrong. What matters is finding good setups with great risk/reward opportunities. And Chinese stocks have been offering those lately. 

After a rocky start to the new year, the energy sector (XLE) is back to its flat 50-day moving average. The price action in energy is a great indicator of recessionary expectations. If we see a major breakdown, the market is likely expecting a recession within the next six months. XLE is bearish if it loses 82, and bullish above 89.

Metals were also strong last week, led by gold but also copper, steel, and aluminum – all helped by the pullback in the US dollar. It’s hard to take the recession fearmongers seriously until we see heavy breakdowns in commodities, especially oil. 

Tech stocks didn’t have a great start to the new year. It’s certainly very early but so far we saw MSFT breaking down, GOOGL and AMZN holding on a thin thread. If AAPL loses 124.50, it is likely to test 120-115. If NVDA, loses 140, it can drop to 120. Friday’s widespread rally saved them for now. The new earnings season is knocking on the door – starts in a couple of weeks. I doubt we will see big moves in techland before at least one major earnings report is out. 

Markets can sometimes not only predict future events but also influence them. The Fed has explicitly said that rising markets in expectations of a rate policy pivot is probably reducing the chances of such. This doesn’t mean that the market will stop trying to speculate about what might happen. Just something to keep in mind. The Fed is still not accommodative so any rallies are very likely just short-term opportunities on the long side and setting up the foundation for further weakness. At least I operate from that viewpoint and with one foot out the door at all times. 

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