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MarketSmith powers the charts in this video

There was a whole lot of buying in the market in the past week or so. The bulls have been on fire ever since January 6th, when the employment report showed a slowdown in wage growth. It’s an important metric for the Fed and it might signal a potential pivot down the road. 

The price action is bullish so I’ve been trading mostly on the long side. I am skeptical that this is anything more than a bear market rally but I am not going to argue with the market. I’ll dance until the music is playing. You might be wondering why is the stock market rallying. Aren’t people still talking about the possibility of a recession later in the year? A big reason behind the equities rally is the weakness in the US Dollar. The bullish scenario is that China is reopening and stimulating its economy, Europe didn’t fall apart due to high energy prices, the Fed is likely to significantly slow down its rate increase and likely stop the raises soon, and the economy might get a soft landing – meaning very low growth instead of a recession. 

So what’s the bearish scenario, you might be wondering? China’s reopening, Europe still keeping interest rates low, still low unemployment in the US despite massive layoffs, and the stock rally that we are currently experiencing can lead to sustained inflation or at least the perception of one. If nothing is broken in the economy and inflation is not back under 2%, the Fed has no reason to pivot. It is likely to remain hawkish longer which historically hasn’t been favorable to stock prices. We will worry about that when it matters which is when prices start to fall again.

In the meantime, the earnings season has just begun. Banks like JPMorgan, Bofa, and Citi beat estimates on Friday. Initially, they gapped down 3-4% on comments about a potential slowdown in the economy, but the dip was quickly bought. The market reaction is an indication of the current sentiment. Let’s see what Netflix and Goldman Sachs bring this week. 

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MarketSmith powers the charts in this video

Financial markets can be counterintuitive quite often. When sentiment becomes too bullish or too bearish, they tend to move in the opposite direction regardless of the news. When a trend has too many disbelievers and doubters, that trend often continues a lot longer and further than commonly anticipated. 

If someone told you three months ago that Chinese ADRs will be the market leaders in early 2023, you would have probably thought they are crazy. Most Chinese stocks were in a free fall three months ago and no one wanted to touch them. Many still don’t. Then, one Monday in October they had a big gap-down day which ended up being the bottom. Most of those stocks have doubled since then. In the past few weeks, I highlighted the notable relative strength in China multiple times and acknowledged that their central bank is the only one that is stimulating the economy. Everyone else is raising interest rates and tightening monetary conditions. Despite that observation, I was reluctant to get involved. My thinking was there is too much political risk and this is probably just another short-term bear market rally. All of those arguments can still be true but I have to admit that the price action has been predominantly bullish. Volume action is showing accumulation as well. Sometimes the market is seeing something six to twelve months down the road that most of us don’t see. Sometimes, it ends up being right, and sometimes -terribly wrong. What matters is finding good setups with great risk/reward opportunities. And Chinese stocks have been offering those lately. 

After a rocky start to the new year, the energy sector (XLE) is back to its flat 50-day moving average. The price action in energy is a great indicator of recessionary expectations. If we see a major breakdown, the market is likely expecting a recession within the next six months. XLE is bearish if it loses 82, and bullish above 89.

Metals were also strong last week, led by gold but also copper, steel, and aluminum – all helped by the pullback in the US dollar. It’s hard to take the recession fearmongers seriously until we see heavy breakdowns in commodities, especially oil. 

Tech stocks didn’t have a great start to the new year. It’s certainly very early but so far we saw MSFT breaking down, GOOGL and AMZN holding on a thin thread. If AAPL loses 124.50, it is likely to test 120-115. If NVDA, loses 140, it can drop to 120. Friday’s widespread rally saved them for now. The new earnings season is knocking on the door – starts in a couple of weeks. I doubt we will see big moves in techland before at least one major earnings report is out. 

Markets can sometimes not only predict future events but also influence them. The Fed has explicitly said that rising markets in expectations of a rate policy pivot is probably reducing the chances of such. This doesn’t mean that the market will stop trying to speculate about what might happen. Just something to keep in mind. The Fed is still not accommodative so any rallies are very likely just short-term opportunities on the long side and setting up the foundation for further weakness. At least I operate from that viewpoint and with one foot out the door at all times. 

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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.

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Disclaimer: Everything I share is for educational and informational purposes only and it should not be considered financial advice.

MarketSmith powers the charts in this video

Most stocks and indexes had a red December giving back the majority of their November gains. Biotech XBI was an exception but it also didn’t really rally in October and November like the rest of the market. The 52-week list is still almost empty but biotech stocks are dominating it. If we see a market bounce attempt, biotechs are likely to be among the leaders. Some biotechs on my Momentum 40 list include AXSM, HALO, HRMY, MRNA, AMLX, SRPT, ACLX, etc. 

In the first three weeks of a new year, we typically see many of the biggest laggards from the previous year outperform, especially small caps. We might see something similar in January unless the indexes really break down. Stocks like TSLA, GNRC, MTCH, ALGN, and SIVB which were the worst performers on the SP500 in 2022 might benefit in a range-bound January. Some of them have already started to bounce.

The next earnings season starts in a couple of weeks with financials reporting first. Usually, the period between earnings seasons is bullish for most stocks but such observations play a little role during bear markets. The indexes are still in one. If QQQ loses 262, it can test 255. If SPY loses 378, it can test 370.

Happy New Year! Let’s make it a great one!

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.