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MarketSmith powers the charts in this video

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Most stocks had a normal pullback to their 20-day moving average in the middle of last week. The dip was bought again and most finished near the highs of their weekly range. The bulls are still in control. Two factors might derail the current rally:

1. A large number of worse-than-expected earnings. Many companies have already guided lower several times in the past six months or so. It will take a really big earnings miss like the one Goldman Sachs had, to see lower prices. For the most part, the market is in the mood to look for the silver lining this earnings season, at least when comes to tech stocks. Just look at the reaction to Netflix’s earnings. They missed earnings by a mile and yet their stock went higher. The market decided to pay attention to a subscriber’s growth, which makes sense because it is a reflection of potential future earnings growth. As we all know, the market is forward-looking.
2. Most major central banks around the world are likely to continue to tighten monetary conditions, especially the ECB and the Fed. They are certainly the biggest wall of worry to climb. 

In the meantime, it seems the stock of every company that announced layoffs is going up. Wall Street is sending a clear message: cut costs and improve efficiency to prepare for a potential recession. Seeing the positive market reaction, more CEOs are likely to follow the same example. Even if a recession doesn’t materialize, the companies will emerge stronger. This is why the market is reacting favorably – GOOGL, MSFT CRM, AMZN, COIN.

The real earnings season starts next week with hundreds of companies reporting. Some of the more interesting reports include TSLA, MSFT, V, MA, ASML, TXN, IBM, ISRG, etc. 

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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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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

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. 

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.