Author: Ivanhoff

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The main indexes have made three consecutive lower highs and lower lows since mid-August. The number of distribution days is growing. It seems they are headed for a test of their summer lows. Some mega-cap stocks like META, GOOGL, and NVDA already made new year-to-date lows and those are the ones that are the most sensitive to the economic cycle. 

The year-over-year Inflation keeps coming above 8%, which probably won’t change in the next few months. This would give the Fed all the excuses they need to keep raising interest rates. As the Fed keeps fixating on inflation, the market is starting to worry about a potential recession in 2023 due to Fed’s action. New credit creation is shrinking quickly as interest rates are rising. Companies that are economic bellwethers keep lowering their earnings guidance by a shocking size. The most recent examples are FedEx (FDX) and Nucor Corporation (NUE). 

While the indexes and most stocks are in a clear downtrend, there are some groups that are showing notable relative strength. Anything related to alternative energy is holding relatively well – EVs (TSLA, RIVN), solar (ENPH, FSLR, SPWR, NOVA, etc.), lithium (LTHM, ALB, etc.), others (BE, PLUG, STEM, etc.). Ironically, the only group that is holding well is the one that is expecting hefty government subsidies.

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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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Check out my free weekly email to get an idea of the content I share with members.

Disclaimer: Everything I share is for educational and informational purposes only and it should not be considered financial advice.

The charts in this video are powered by MarketSmith

The price action in most stocks has been notably bearish in the past few weeks. We saw quite a few green opens (gaps up) and red closes – the morning gains faded throughout the day and the indexes closed near their lows of the daily range. SPY and QQQ slashed through their 50dma very easily; then bounced back and found resistance right under their 50dma. In the meantime, correlations among most stocks have increased and they started to move together – something we typically see during corrections. The market reaction to earnings has completely changed – only a few weeks ago, stocks were rallying on missed estimates and lowered guidance. Lately, the market has been selling both positive and negative earnings surprises. Sentiment has changed since Powell’s remarks at Jackson Hole. Now, the market is worried that the Fed will keep tightening until inflation or job numbers fall significantly, whichever comes first. As a result, most stocks are under pressure. Nothing is safe. Even energy and metals that held relatively well until last week, are starting to sweat a bit.

Try my subscription service which includes a private Twitter feed with option and stock ideas, emails with concise market commentary and actionable swing, intraday, and position trade ideas, the Momentum 40 list of market leaders, and much more. See some of the recent testimonials.

PERFORMANCE

Here’s a Google spreadsheet tracking all closed options and stock ideas shared on my private Twitter stream and emails for subscribers.

Check out my free weekly email to get an idea of the content I share with members.

Disclaimer: Everything I share is for educational and informational purposes only and it should not be considered financial advice.