Author: Ivanhoff

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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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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.

The charts in this video are powered by MarketSmith

The main premise behind the summer rally was that the Fed is going to pivot because of the possibility of overdoing it and causing a severe recession. This was the market’s bet. As a result the stocks that were hit the hardest since February 2021 due to rising interest rates – like biotech, were among the best performers in the past couple of months. On Friday, Fed’s chairman was very clear that the Fed is not ready to change its tightening policy just yet, and bringing down inflation continues to be the main concern. It seems his words sobered the market up fast and caused a major selloff across the board – biotech, semis, software, retailers, financials, industrials, consumer discretionary, etc. 

Last week was the second down week in a row for the main indexes. Both, the large-cap S& P 500 (SPY) and the small-cap Russell 2k (IWM) tested their 50-week moving average two weeks ago and have pulled back about 6-7% since then. The next potential zones of support are their 50-day moving average: about 398 for SPY and 181 for IWM.

The only market areas that have handled the selling in the past couple of weeks relatively well are commodities – energy like oil & gas, coal, uranium, solar; fertilizers, and industrial metals. Those groups were clear leaders in the first half of the year but then underwent a deep 30-50% drawdown during the summer only to bounce back later. The inflation trade is back on. The question is for how long? If the market is really worrying that the Fed’s tightening policy will lead to a severe recession, then those groups will start to crumble as well.

Typically, future market leaders build new bases while the indexes correct. It’ll be interesting to see if the current leaders like ENPH, FSLR, LNTH, SWAV, EVH, GFS, ON, WOLF, TMDX, CELH, and others will simply remain above their 20 and 50-day moving averages while the indexes potentially sell off further. From a strictly seasonal perspective, stocks tend to be weak ahead of the mid-term elections and strong after. Obviously, there are many other factors currently at play. I will remain nimble and take things one week at a time.

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.