Author: Ivanhoff

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If we judge by the most constructive charts currently, we can say that the market is pricing a potential recession at some point this year. Look at what is setting up near the 52-week highs list: consumer staples like General Mills (GIS), Dollar General (DG), Post Holdings (POST), Campbel Soup (CPB); auto parts chain Autozone (AZO); online education Stride (LRN); health insurance Humana (HUM); big pharma Merk (MRK) and Eli Lilly (LLY), etc. These are not the type of stocks that lead at the beginning of a sustainable bull run. We can still trade them and profit from them but they are slow movers so don’t expect a lot of volatility in those. 

Biotech is another group showing relative strength in the past few weeks. XBI topped in February of 2021 and it fell 65% in the following 15 months. You have to go all the way to 2000-2002 to see so much destruction in so little time in a sector. The most recent drop overshadows even the Great Recession of 2007-2008. Over the past few weeks, XBI went up above its 20 and 50dma and successfully bounced off them. The next big level of potential resistance is 80. If that is cleared and then successfully tested, XBI will probably reach its 200dma near 95-98. It’s a bear market rally but those can be furious. 

Chinese stocks have been in the doghouse for a long time. The Chinese Tech ETF – KWEB topped in February of 2021 and then it fell 80% in the following 13 months. KWEB seemed to have bottomed in March of 2022 (as of right now) and since then it has made several higher lows, slowly establishing itself above its rising 20 and 50-day moving averages. KWEB is still below its 200-day moving average and the recent push higher can be considered just a bear market rally. And yet, quite a few Chinese ADRs have been acting constructively as of late: breaking out, bouncing off their rising 20-day moving averages. Some names that fit that criteria: PDD, BABA, BIDU, JKS, YUMC, HTHT, EDU, JD, ATHM, LI, NIO, etc.

In the meantime, Micron missed earnings and gave a huge cut in guidance bringing down the entire semiconductor index with it. SMH closed at new 52-week lows on Friday –  another sign that the market is currently more worried about a recession than inflation and supply chain constraints. The market is not always correct but it’s rarely a good idea to argue with it. 

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The market is better at predicting the news than the news is at predicting the market. Financial markets typically look 6-9 months ahead and try to anticipate what could happen. They are currently betting that the Fed’s aggressive tightening policy is going to send the economy into recession and the Fed will have to stop hiking sooner than previously expected. As result inflation expectations are tapering and we saw a major mean reversion last week. The worst-hit groups year-to-date outperformed significantly last week – ARKK went up 18%, the cloud ETF – WCLD, went up 15%, biotech XBI went up 14%. In the meantime, the best performing sector year-to-date – oil & gas (XOP), lost 6%, tested its 200-day moving average and it is now down almost 30% from its annual highs. 

The odds are that this is just another bear market bounce that will eventually be faded again. It is really hard to know how long it can last. The conventional wisdom says that the declining 50 and 200-day moving averages are likely to be major areas of resistance for SPY and QQQ but markets often overshoot. In the meantime, there’s nothing wrong with being nimble and playing the relief rally. If the bounce has legs, we should see more stocks setting up and offering decent risk/reward entry points. As of right now, the number of good long setups is still relatively small.

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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

In a bear market, eventually, every sector gets under pressure. Up until last week, oil and gas stocks were enjoying one of their best years. And then, they were hit hard. The Fed raised the base interest rate by 75bps and declared that its goal is to bring down inflation to under 2%. All of a sudden, the market’s main worry was not stagflation (high inflation and very low growth) but a recession (negative growth). The oil & gas sector ETF is now down 24% from its 52-week highs. Despite the drop last week, most oil & gas stocks are still in a long-term uptrend and many might have a short-term bounce near their year-to-date volume-weighted average price.

There are not many stocks left that are still above their 50 and 200-day moving averages. Lately, we have seen select Chinese ADRs and biotechs push against the mainstream weakness but overall there are just a few decent-looking long setups and none of them are really very exciting. The silver lining is that even the scariest and longest bear markets experience powerful counter-trend rallies from time to time. Market breadth has become so weak that we might be close to one. SPY is about 5-7% from major potential support near 350–340. If that level doesn’t hold, we might see a major panic selling and acceleration lower. The faster, the better. It’s always preferable to rip the bandaid quickly than to be tortured for many months by choppy down-trending price action. I am not in a rush to be aggressive on the long side but if I see signs of a bounce, I will try some long exposure. Typically, bear market bounces characterize by very high correlations, so I might just as well participate with an ETF like SPY, UPRO, QQQ, or TQQQ.

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.

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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.