Category: Uncategorized

MarketSmith powers the charts in this video

Last week, it became clear that the Fed is not pivoting anytime soon. The price action in commodities and the latest payroll report confirmed Fed’s fears. Inflation is sticky and the Fed will have to remain on its current course of raising interest rates and reducing its balance sheet. When the Fed removes liquidity from the market, most stocks are likely to get a lower valuation.

Despite the selloff in the indexes, where tech stocks were hit the hardest, we remain in a market of stocks environment. There are good opportunities on both the long and the short side. Lately, more and better opportunities are on the short side, which is natural – most stocks follow the general direction of the market. 

The main indexes continue to make lower highs but they haven’t a new lower low yet. The main factor that saved the market from dropping last Friday was the decline in the US Dollar which has been highly negatively correlated to stocks this year. The message is clear. No rally in equities can sustain without the US Dollar falling. Can the latter really happen when the Fed is a lot more strict than other central banks with it comes to raising interest rates? Probably not, at least not for too long. 

There are still quite a few companies left to report earnings. One of the clear trends this earnings season is the decimation of software stocks. In fact, the cloud ETF, WCLD dropped almost 6% on Friday making new 52-week lows. In the meantime, crude oil was up 5%, and industrial metals ETF, XME was up 7%. This is a typical reflation move. We will know more next week, but if the moves from Friday follow through, the market is certainly not worrying about recession just yet.  

Don’t forget that midterm elections in the US are on November 8th and stocks tend to be extra volatility around in the days before and after them.

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.

MarketSmith powers the charts in this video

Amazon, Meta, Google, and Microsoft missed their estimates and/or gave very weak guidance. They sold off and the main indexes didn’t even blink. The Nasdaq 100 and the S&P 500 still finished the week deep in the green. People wanted a “market of stocks” environment. This is what we are having right now. While some of the mega-caps are struggling, there are plenty of stocks from various sectors that are breaking out after earnings and following through. I don’t know if this is just a short squeeze before another rug pull, but last week certainly provided good opportunities to make money on both the long and the short side, if you were nimble enough. 

FOMC is this Wednesday. One can make the argument that the market is currently betting that the Fed is going to somehow pivot. Other central banks (ECB, Canada, Australia) have already said that they plan to slow down with their rate increases. The Bank of Japan is already doing more QE. Can the Fed also blink and fold? I would not bet on it, so I would expect further volatility next week. If the market really wants to continue to rally, it doesn’t matter what the Fed is going to do or say next Wednesday. News is always explained based on the price action: 

The Fed raises 75bps and stocks go down – “What did you expect? They said they will keep raising”. 

The Fed raises 75bps and stocks go up – “The worst has already been priced in”.

See. It is easy to come up with a viable explanation after any price move.

The real question here is how do you make money or at least, how do you make sure that you don’t lose too much of it? For me personally, earnings plays have been working well on the day of earnings and as a follow-through the next day or a few days later. Some recent examples include NFLX, ISRG, SHOP, DXCM, WING, ENPH, etc. The earnings season is still young. There are plenty of companies left to report. Fresh news leads to big short-term moves and sometimes, to big longer-term moves. In the meantime, I am keeping an eye on volatility and correlations. If two of the main three indexes (SPY, QQQ, IWM) close below their 20-day EMA, this bounce can be considered over and I’d focus on the bearish setups.

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.

MarketSmith powers the charts in this video

The S&P 500 (SPY) finally had a strong weekly close for the first time since early September. SPY has room to run to 380 where it will probably encounter some minor resistance and pullback to 375. Then, if it clears 380 from the second attempt, it can run to about 390.

Last week was chop, chop, chop, and then a strong close on Friday. It might be related to monthly options expirations. It might be connected to the Bank of Japan intervening to boost the Yen which led to a decline in the US Dollar. For the better part of this year, stocks have negatively correlated to the US Dollar. Another viable reason is the overall sentiment. People are getting very pessimistic – “recession” was one of the main trending topics on Twitter Friday morning. The markets love to play a contrarian game and react in the opposite way when something becomes too mainstream. There has been so much chop lately that almost no one believes this rally. It was the same in the summer. It is normal to behave that way. The human mind tends to extrapolate the most recent price action into the future. If it has been choppy, we expect it to remain choppy. If it has been rising, we expect it to continue to rise. The market rarely conforms to widely perceived expectations for too long. This is why the big money in markets is made not when you are right about something that everyone is right about (the consensus opinion) but when you are right about something very few are.

When it comes to individual stock setups, one sector clearly stands out. It is not biotech. There are still some Ok setups there but the sector showed how vulnerable it is to interest rate increases last week. XBI dropped 5% in one day last Wednesday and its relative strength line has been flat-lining since August – this is now how leaders behave. The sector that has been shining as of late is oil & gas. Currently, about 80% of all stocks in an uptrend are oil & gas. Many have been perking up in expectations of strong earnings. Others like SLB continued to go up after reporting earnings. I don’t know how sustainable this move in energy names is in the face of rising interest rates, but this is where many of the constructive setups currently reside. Defense stocks also had a very strong week and show notable signs of accumulation – LMT, NOC, BAH, ASLE, CW, HII, etc. 

Big tech reports earnings next week and will significantly impact the indexes and the overall sentiment. What matters is has the worst has already been discounted and is Big tech still doing fine at some level. Most of the big tech companies have already slashed their guidance so expectations are low. They will probably beat earnings estimates (as usual) but the market will pay attention to margins, sales estimates, and future earnings guidance. If the market wants to rally in the short-term, it will find a reason to rally.

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.