Author: Ivanhoff

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Most stocks are in a bear market. There has been no follow-through on earnings breakouts this season. Most upside gaps are either faded immediately or lead to exactly one day of upside action before they get slammed. On the other side, there has been plenty of follow-through on earnings breakdowns – see PYPL, FB, for example. 

Nothing goes straight down or up. Occasionally, bear markets have viscous short-term rallies just so they can scare the shorts out of their positions and trick new longs in. When the bear lays out honey, it is usually a trap. The tiny low-volume bounces just create better risk/reward short opportunities. The bounce we saw in the first half of February was followed by more selling. In fact, many cloud and Internet stocks have started another leg lower. 

To top it off, there is a war lingering in the air. I don’t know how much of it has already been discounted but markets tend to overshoot. Scared people tend to panic and panic leads to liquidations and forced selling. No wonder buyers are with one foot out the door and have to conviction. And this won’t change until the indexes make a higher high which currently means 460 for SPY. In rising markets, it pays to hold longer. During corrective, choppy markets is important to be nimble and take profits quickly on both long and short positions because they tend to disappear quickly. If you cannot adjust to this new reality, it is better just to stay on the sidelines and wait out the storm.

The main indexes seem headed for a test of their January lows. This means 420 for the S&P 500 (SPY), 334 for the Nasdaq 100 (QQQ), 190 for Russell 2000 (IWM). They don’t have to get there in a straight line. There could be another bounce along the way.

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The latest CPI readings came at 7.5%; a bit higher than expectations. The market brushed off the initial selloff on the news and we even saw software and biotech stocks leading the bounce which to me was a clear sign that the 100-200 basis points increase in interest rates was probably already discounted. Then Friday’s Ukraine headlines came and the tech was poleaxed while commodity-related groups shone. Oil & gas: XLE, XOP, metals and mining: XME, fertilizers: CF, MOS NTR, SQM; are currently the leading stocks in the market. It’s not ideal when basic materials are rising and tech is in the gutter but we have to work with what the markets provide us. Trends are trends no matter the asset.

Commodities are cyclical. Their outperformance is not from yesterday. It started more than a year ago. It’s anyone’s guess how long the upswing stage is going to last. The narrative and earnings growth is on their side right now. Rising inflation expectations, reopening after Covid, and Russia/Ukraine crisis are driving oil prices. Financial markets always overshoot. Less than two years ago, no one wanted to touch energy stocks. The world was under Covid lockdown and WTI oil even went negative for a brief moment. Fast forward to today, people can’t get enough energy stocks. 

Thursday and Friday were big distribution days for the S&P 500 and the Nasdaq 100. Both made lower highs. SPY tested its 50-day moving averages and reversed lower. QQQ tested its 200-day moving average and pulled back. Both seem headed for a test of their January lows. If this happens, I will be watching for bullish divergences. Will fewer stocks make year-to-date new lows if the indexes revisit their lows? This would be a foundation for a more sustainable bounce. The alternative would be another leg lower. If QQQ cannot hold 340, it will probably test 320 which would represent about 20% drawdown. If 320 doesn’t hold, the next level of potential support is 300. Keep in mind that markets rarely go straight down or up. There are usually vicious rallies that interrupt downtrends. The silver lining is that the bigger the correction, the bigger the opportunities afterward.

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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 S&P 500 came close to its 50-day moving average and reversed. The Nasdaq 100 tested its 200-day moving average and pulled back lower. Finding some resistance after going up for several days in a row is not a big surprise. It’s how markets move – every rally and every selloff have counter-trend reactions. What matters is what happens afterward. The bearish scenario for next week is clear – anything that loses its lows from Friday (Feb 4th) can be shorted for a quick trade. For example, if SPY loses 444, it will probably fall to 440. If QQQ loses 352, it is likely to test 340. If those breaks happen, most individual stocks will follow.

Now that we covered the bearish scenario, we can focus on the alternative. Last week brought new bullish arguments. We finally saw some recent IPOs like BROS and HOOD wake up and push higher. This is a clear sign of improving risk appetite. In the meantime, quite a few oil & gas stocks broke out to new 52-week highs. Commodity-related names are currently the only momentum stocks left. Financials are quickly catching up with the spike in interest rates. XLF is back above its 50-day moving average.

The era of negative bond rates is coming to an end and this has led to a repricing of all risk assets. Is the repricing over? Probably not for everything but plenty of software, Internet, biotech stocks and crypto fell 50% to 80% in the past three months. That’s not a bear market; that’s a crash. The silver lining last week was that the spike in interest rate didn’t lead to further downside in those risk assets. On the contrary, they bounced. This could be the proverbial dead-cat bounce that just goes nowhere fast or an acknowledgment that even if rates go from 0% to 2.5% quickly, some businesses will grow into their valuations, eventually. Don’t get complacent. Many of those stocks are not going to go back to their all-time highs for many years if ever. That’s how financial markets work. A constant cycle of booms and busts and new trends.

We are still in the midst of earnings season. If Facebook, Amazon, and Snapchat can trade like small-cap biotech stocks, you know that anything is possible. No stock is safe, no bet is a sure thing. My keyword for 2022 was higher volatility and this is exactly what we have been seeing so far. Adjust to the new market reality because it can last much longer than you expect.

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.