Author: Ivanhoff

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We are in the sentiment cycle where good news for the economy is bad news for the stock market. September jobs number came a bit above estimates and the market sold off on Friday erasing most of its gains for the week. The Fed won’t pivot until it sees a significant uptick in unemployment or a decline in inflation. More interest rate increases mean a lower valuation for most stocks. 

The silver lining from last week is that we might have caught a glimpse at the future market leaders. The second the market bounced, we saw quite a few biotech stocks try to break out to new 52-week highs. These are the future leaders of the next more sustainable bounce – be it a bear market rally or a new bull. The former is way more likely. I am not saying that biotechs won’t get hit if the general market has another leg lower. They will get hit but they’ll probably also build new bases to work with. 

The other names showing relative strength lately are oil & gas. Most have had a tremendous bounce lately and are now back to their 52-week highs. It’s a big conundrum – higher oil prices mean sustained inflation for longer; Sustained inflation means Fed will continue to rise interest rates. Higher interest rates mean a higher likelihood of a recession next year. Recession means lower demand for oil & gas and therefore lower prices down the road. This is how the cycle usually goes. I don’t think the market is looking that far ahead. Oil companies are likely to report robust earnings this quarter and the market is discounting that.

The past few weeks were perforated by lowering guidance news from various sectors. AMD is the latest more notable example. Companies are actively trying to reduce market expectations. It could be because their business is really deteriorating at a fast pace or because they want to be able to surprise or at least look less bad during earnings season. The latter is knocking on the door. Everyone was afraid of the last earnings season. The fear of weaker-than-anticipated earnings reports was confirmed in many cases but the market reaction was predominantly bullish because of the expectations for Fed to pivot. Will we see something similar this time? So far, the data doesn’t confirm it. Let’s see how the market will actually react to earnings. Seasonally, stocks tend to do well past the mid-term elections which are in a month. 

One thing is clear. The new earnings season will provide good opportunities on both the long and the short side. They might last only a few days. We will take what the market is offering.

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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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The charts in this video are powered by MarketSmith

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.

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.