Author: Ivanhoff

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The indexes ran to their February highs, gapped slightly above them to force the last remaining shorts to cover and cause some FOMO; then they reversed lower. Breakouts stopped working in the past few days which is a big sign that the market is stalling and in need of some consolidation. It’s normal to see a reaction after multiple days of rallying from the bottom. The question is which stocks will make higher lows and continue higher and which ones will keep pulling back to new lows. Semis and financials already tested their 20dma. So far, the bounce attempt is very tepid. Retailers broke below their 20dma and are looking the most vulnerable. The latter makes sense. Raging inflation will impact not only people’s purchasing power but also their willingness to spend. 

The main indexes, SPY and QQQ printed inverse weekly candles. It would not be the worst thing in the world if QQQ pulls back to 350 and SPY to 445-440 and let their rising 20-day moving averages catch up with price.

Don’t get overly bearish. This minor pullback in the indexes seems like another sector rotation. The weakness in semis, banks and transportation stocks on Friday coincided with strength in biotech. 63 stocks went up 10% or more last week vs 23 that went down 10% or more (priced over $15, average daily volume of 500k shares). Looking under the surface, I still see plenty of constructive long setups. It’s a different question if they work. If the indexes are weak, many won’t go past the first day’s breakout.

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This has been the ongoing theme of 2022 – interest rates continue to rise and they are repricing the entire market. As a result, oil and metal ETFs are up more than 40% year-to-date, financials are flat, the tech sector is down 10%, most software names are down 20%+, homebuilders are down 24% for the same period. The war in Ukraine and the sanctions on Russia have exacerbated the ascent in commodities. One industry’s rising profits has become other industries’ rising costs.

Most stocks have been rising ever since the Fed announced the 25bps increase in interest rates two weeks ago. It seems the market is thinking that the Fed is bluffing about rapid rate hikes. The big question is can tech stocks continue to climb a wall of worry or this is just another bear market bounce? The common-sense answer is that this rally is not sustainable in the face of rising interest rates, major inflation, and supply chain challenges and yet, it is getting stronger and involving more and more stocks. You know what they say about the positive reaction to negative news – there’s nothing more bullish. 

I mostly see bullish setups. Energy, metals, fertilizer stocks are following through higher after a brief pullback to their rising 20 and 50-day moving averages. They are acting like typical momentum stocks. Semiconductors had a major accumulation day last Thursday and most are looking higher – SOXL, NVDA, AMD, QCOM, AVGO, ON, AOSL, etc. Even the meme stocks GME, AMC, and the proverbial dogs, cannabis stocks are waking up. The latter might be more of a major hubris sign, which tends to happen just before a rug pull but it is also clear proof that there’s a rising risk appetite.

I am not saying that I am overly bullish. I continue to be cautious and take frequent short-term profits in this tape. I realize that the correction and the choppiness earlier in the year have impacted my and most market participants’ sentiment. It’s normal to disbelieve this rally and to be ready to sell everything by the first smell of trouble. This is why it is said that rising markets climb a wall of worry. The more important thing here is to not be stubbornly fighting against this rally and remain open-minded to all possibilities no matter how bizarre they might seem.

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Most stocks started to rally ahead of the FOMC meeting and accelerated their ascent afterward. 25 basis points increase in rates is probably viewed as too conservative. The take is clear – there’s is rampaging inflation that is not likely to taper any time soon and the Fed is being overly careful with the interest rates increases. 

The bounce in most stocks last week was statistically significant. The S&P 500 gained more than 1% four days in a row. All cyclical sectors gained. The worst-hit groups went up the most – Europe, China, software, biotech. The odds are that this is just a bear-market bounce but we have to also admit that is normal to distrust any rally after the constant breakout failures and 50-90% drops in so many stocks in the past four months. Trends die hard because sentiment changes slowly – this is why there are so many bounces in uptrends and downside reversals in downtrends. Sentiment follows price action.

I am operating from the view that this is a bear-market rally. I am still participating in it but taking quick profits. If the major indexes can go back over their flat to rising 20, 50, and 200-day moving averages, I will have a good reason to change my mind and tactics and look for longer-term holdings.

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.