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The typical bear market rally is a 50% to 61.8% retracement from the last major high. For the S&P 500 (SPY) that would mean 410-420. It is not far from there. In the meantime, some of the most shorted stocks have staged monstrous short squeezes. Such price action often precedes overall market pullbacks.

The job numbers last Friday surprised everyone. Why does it matter? The market rally in the past month or so has been mainly based on the assumption that the worst of inflation is behind us and the Fed’s tightening is not going to be as aggressive in the future. This assumption might turn out to be a bit premature. We will know soon enough. July CPI readings come out on Wednesday morning. As usual, we will be paying attention to how the market reacts to it; not to the numbers themselves.

Otherwise, the recent rally has been fueled by government spending (clean energy, semiconductor bills), acquisitions (especially in the biotech field), and general improvement in market sentiment – most earnings received a favorable market reaction this season. Let’s see if those catalysts will be strong enough to fight a hawkish Fed.

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We see more stocks from various sectors setting up. This season, the market reaction to earnings has been predominantly positive – many names didn’t sell off after missing estimates and cutting guidance; many broke out after stronger than expected earnings. This is a notable change in sentiment compared to the previous two earnings seasons.

Other than Facebook (META), all mega caps had positive reactions to their earnings this season – TSLA, GOOGL, MSFT, AAPL, AMZN. Why does it matter? Those stocks can only be moved by institutional money.

Two new Bills in the making have given a significant boost to two groups of stocks – semiconductors and clean energy. Those are shaping up to be among the current market leaders.

The Fed has given signs that interest rate increases will slow down if the economic data requires it. They are paying attention to inflation and jobs data primarily. GDP was negative in the past two Qs, so the US is basically in a recession. The market reads this as a reason for the Fed’s tightening to become a lot less aggressive.

Keep in mind that all major indexes are still below a declining 200dma so this is considered s bear market 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.

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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

Thin markets can move fast. We saw it last week. Quite a few stocks went up 10-15% on little volume only to give most of it back. The few stocks near 52-week highs that tried to break out failed, only to find support near their rising 10 and 20-day EMAs. Typical bear market action.

The indexes had a good run since the last CPI was released about ten days ago. Now it’s time to test the validity of this rally. If QQQ cannot hold 295, this rally can be considered over. The same can be said if Russell 2k IWM doesn’t hold 175. I’ve believed all along that the latest move higher was just a bear market rally. I played it as such and made sure to limit my position size and take frequent profits on strength. 

The next week is likely to bring extra volatility to the tape. There’s an FOMC meeting on Wednesday. The Fed is expected to raise interest rates by 75bps. Anything more or less would be considered a surprise that it is probably not priced in. The market will also pay attention to Fed’s future intentions.  We also have earnings season which has just begun. Snapchat fell 40% after missing estimates and citing that the margins in the advertising business are starting to shrink due to companies cutting their marketing budgets. Will find out if this was just a Snapchat problem or something much more widespread. Big Tech reports next week and everyone will be paying attention. If Apple, Google, Facebook, Microsoft, and Amazon mention troubles and cutting costs, it will be felt everywhere. What will matter the most is the market reaction. When sentiment is improving, the market is looking for the slightest reason to go up and vice versa. If people want to put money to work, it will be seen in the price action – stocks will have high-volume breakouts and low-volume pullbacks that will resolve higher. Downside gaps won’t last long and they will be faded as we saw in financials in the past week or so. If the market has further to go down, the good news is not going to bring a sustained move higher. Our job is to find the current trend and to participate in a low-risk manner.

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.