Author: Ivanhoff

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The 10-year US Treasuries yield is not far from reaching 3%. Less than two years ago, it was 0.5%. It should not be a big surprise that most tech stocks have been under heavy pressure. The Nasdaq 100 (QQQ) fell to 340 last week. Its March lows are only 20-points away. If you think that it’s impossible to test them, keep in mind that the semiconductors ETF – SMH, just did exactly that. 

The earnings season has just begun. Big Tech will report in the next three weeks. As always, some will show more resilience to the current driving economic forces and report better than expected results. This is why I believe that choppy, range-bound action is more likely than an accelerated selloff in tech.

The current leaders are still concentrated in the energy, metals, and agricultural space – oil, gas, coal, uranium, gold, steel, potash, etc. Most of them have started a new leg up in the past couple of weeks. Don’t forget that even momentum leaders need to pull back and consolidate occasionally. Don’t chase stocks that are up several days in a row because they don’t offer good risk-to-reward. If you have to endure a 10% pullback to make a 10% potential return, the setup is too sloppy. 

There’s another theme that is starting to emerge again – travel stocks are showing relative strength. A few weeks ago Carnival Cruises (CCL) said they are seeing record bookings. Last week, Delta Airlines was very optimistic about booming demand despite higher fuel costs. As a result, other travel stocks are perking up – hotels Marriott (MAR) and Hilton (HLT) are near all-time highs. The stocks of AirBnB (ABNB) and car rental companies Hertz (HTZ) and Avis (CAR) are also looking constructively. People want to travel this year as much as possible no matter what and it is shown in the charts of the relative companies. We don’t know if this group of stocks can continue to push higher in the face of additional market weakness but their relative strength is something to pay attention to. They are likely to be among the leaders when the indexes bounce again.

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Most of the first quarter was all about rising interest rates and inflation expectations. As a result, oil & gas, coal, uranium, metal, potash, and other basic material stocks have outperformed substantially year-to-date. There is a new major market theme that emerged in the past couple of weeks. Now, the market is not worried only about inflation. It has begun to discount a potential recession later in the year. Look at the best performers the past two weeks – so many came from defensive sectors like healthcare, utilities, REITs, and consumer staples (discount stores, auto parts stores, farms). 

186 stocks went down 10% or more last week. Tech stocks (semis, cloud, Internet), financials and US Treasuries were hit the worst. Anything cyclical and related to growth is under pressure. Tech is looking heavy and on the brink of breaking down. QQQ managed to finish right on its 50dma. If it cannot bounce above 353 on Monday, it is likely to test 340 soon. 

34 stocks went up 10% or more for the week. The winners – oil & gas names, discount stores, uranium, potash stocks – typical stagflation move. The next earnings season and CPI report are right around the corner. Maybe, the market has begun to price strong earnings in energy stocks and inflation that is likely to remain elevated for the foreseeable future. If the same trends remain, we should see a continuation higher in many of the energy names that started to break out last week

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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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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.