MarketSurge powers the charts in this video.
Tech stocks just had their worst weekly drop since the bear market of 2022. This time it’s not because interest rates are rising or growth is slowing. It’s very simple – escalating tensions in the Middle East are causing a risk-off behavior. Risk-off means reducing exposure to the most volatile parts of the market – momentum stocks and rotating into lower-beta, more defensive sectors like financials and consumer staples. If the situation doesn’t worsen any further, tech stocks will probably recover just as quickly as they fell.
No one knows what will really happen in the next few weeks. The odds are that sane heads will prevail but the market is not taking this chance and money managers around the world are reducing risk and hedging by buying put options, which causes further downside pressure. Let’s entertain for a moment the possibility of a war escalation. No one wants it but let’s imagine this scenario so we are better prepared. Stocks will likely fall further. Maybe we will see a 20% correction in the major indexes and 50%+ correction in most momentum high-flyers. If this happens, it’ll likely get to a point where the Fed will decide to cut rates earlier than currently anticipated and stocks will have a huge rally – from lower levels than now. This is the worst-case scenario for bulls – if you are patient and protect your capital during this potential rout, you will have incredible opportunities when it’s done.
They say that there’s no support during steep corrections. We saw that last week. None of the important potential support levels held for more than one percent bounce. The selling pressure was too overwhelming. Some overleveraged momentum funds were probably being forced out of their positions due to margin calls.
Let’s not forget that the new earnings season has just begun. We are already seeing some emerging trends. The company that kick-started the big rally in semiconductors in the first quarter, TSM beat and guided higher again but this time, it sold off. The entire semiconductor sector was under pressure. SMH lost 10% for the week. NVDA dropped almost 14%. ARM fell 30%. NFLX also reported strong numbers but it still sold up – dropped 9% in one day. So far, the reactions to tech earnings are not very bullish. In the meantime, financials have been a mixed picture. JPM beat estimates but sold off. WFC, GS, MS went up. Airlines also broke out after strong sectors – UAL, ALK.
We are currently in a risk-off tape. For me, this means focusing mainly on intraday setups and the occasional short-term swings (2-day hold); waiting for a market bounce, lower volatility, and tighter setups for multi-day swing trades.
Try my subscription service which includes a private Twitter feed with option and stock ideas, emails with concise market commentary, real-time market education, the Momentum 40 list of market leaders, and much more. See what subscribers say about my educational service.
Check out my free weekly email to get an idea of the content I share with members. How my ideas/alerts did.
I published a new trading book recently (2023). Check it out on Amazon.
Disclaimer: Everything I share is for educational and informational purposes only and it should not be considered financial advice. Read my full disclaimer here.
