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MarketSmith powers the charts in this video

Financial markets strive to live in the future and anticipate events that haven’t happened yet. Last Thursday, the consumer inflation data came at the still-high 7.7% level but it was a little bit below mainstream estimates. This was enough to spark a rally of epic proportions, just like the one we saw in early summer. The rally that started in late June lasted until mid-August and brought some significant opportunities, especially among the most shorted names at the time. Are we currently experiencing something similar? After all, stocks tend to do well post-midterm elections. The market is betting again that the Fed will slow its rate increases. It is currently pricing a 50bps rate increase in December, not a 75bps. Will the market end up being wrong again in mid-December? Maybe, but there’s a long time until then and we can enjoy a rising market. 

Let me make one thing crystal clear. I don’t have the illusion that the latest lift in stocks is anything more than just another bear market rally but that doesn’t mean that it can’t continue much longer than most expect and that you can’t make money in it. Bear market rallies are powerful and can lift all boats, not equally. The first stage is led by the most shorted and the worst-hit stocks. If there’s a second stage, the new leaders step up and outperform. The one drawback of the current push higher is that metals and other commodities are leading which means that inflation expectations will remain elevated and the Fed hawkish. The last FOMC meeting for the year is on Dec 14th. I suspect, most stocks will rally until then. Maybe, there could be a selloff in a week or so before it as some market participants will expect the Fed to remain on its current tightening warpath and take profits preemptively.

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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.

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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.

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.