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April was four weeks of relentless selling for all major indexes. Small caps Russell 2k (IWM), large caps S&P 500 (SPY), the Nasdaq Composite which includes 3,000 stocks made new year-to-date closing lows. In fact, all of the above with the exception of SPY, have fully erased their entire 2021 gains. SPY has held better thanks to the Q1 strength in basic materials, energy, and consumer staples but even those sectors have been under some pressure lately. In a bear market, eventually, they get to every sector. There are no safe places to hide. The picture is not pretty but it is not surprising either. Last week, we talked about the recent tendency of stocks (especially tech) to sell off ahead of FOMC meetings. There’s a new one scheduled for the next week – May 3rd and 4th. The big question is do we get the usual post-FOMC bounce or will this time be different? The main indexes are on the brink of breaking down and having another leg lower. If the Fed doesn’t tone down its stance on future interest rate increases, look below. 

The earnings season has just begun. The big theme so far is resetting expectations. Juggernauts like Google and Amazon, which everyone thought were invincible, missed estimates. Apple beat them but gave wide-range guidance citing supply chain challenges in China and the market sold it anyway. Tesla dropped 20% since its best earnings report ever as Elon Musk is raising money to fund his Twitter purchase and short-sellers have smelt blood in the water. If those major stocks can get hurt, no one is safe. This is why market sentiment has turned quite bearish. Many have already reached a point where they just want out of the market. Hitting everyone’s favorite stocks will do that.

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Correlations between stocks went up significantly in the past few days. Tech stocks are not the only ones under pressure. They have been joined by basic materials. Everything is getting sold; even the defensive sectors like consumer staples and utilities. I see two main reasons behind the recent weakness:

1. The market is pricing in an aggressive interest rate hike. Stocks went down significantly in the two weeks ahead of the FOMC meetings earlier in the year – Jan 25-26 and March 15-16. The next meeting is May 3-4th. It seems we are seeing something identical right now. Stocks bounced after the FOMC meeting the past two times. 
2. After the Netflix earnings fiasco and lower guidance, the market is worried that other companies will report similar issues and it is pricing them in advance just in case. Remember that financial markets move based on sentiment and expectations in the short term. They often panic before they ask questions. The silver lining is that the worst might be discounted ahead and see more constructive price action after the majority of earnings reports are behind us.

Obviously, many basic material stocks are still in an uptrend. They might still find some support near their rising 50 and 100-day moving averages. It usually takes some time for an uptrend to turn into a downtrend. There is a period of clear distribution and choppiness in-between. Keep in mind that the first half of 2008 was somewhat similar to 2022. Basic materials were strong while the rest of the market was weak. At some point, even commodity-related stocks started to break down and then the entire market accelerated lower. Pay attention when correlations go to 1.0. It’s a sign of widespread liquidation. 

What’s next? We are in the midst of earnings season. The next three weeks will be heavy in reporting. What I have noticed so far is that stronger than expected earnings reports are getting little to no market love – the upside gaps are smaller and they are often getting faded. See Tesla (TSLA) or United Airlines (UAL) for example. Downside earnings gaps on the other side are following through. Look at ISRG, VZ, HCA from last Friday. They all gapped down right below previous support and quickly sliced lower from there. With the risk of saying the obvious, upside earnings gaps do a lot better during bullish markets and downside earnings gaps find better tractions during bearish markets. 

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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

The 10-year US Treasuries yield is not far from reaching 3%. Less than two years ago, it was 0.5%. It should not be a big surprise that most tech stocks have been under heavy pressure. The Nasdaq 100 (QQQ) fell to 340 last week. Its March lows are only 20-points away. If you think that it’s impossible to test them, keep in mind that the semiconductors ETF – SMH, just did exactly that. 

The earnings season has just begun. Big Tech will report in the next three weeks. As always, some will show more resilience to the current driving economic forces and report better than expected results. This is why I believe that choppy, range-bound action is more likely than an accelerated selloff in tech.

The current leaders are still concentrated in the energy, metals, and agricultural space – oil, gas, coal, uranium, gold, steel, potash, etc. Most of them have started a new leg up in the past couple of weeks. Don’t forget that even momentum leaders need to pull back and consolidate occasionally. Don’t chase stocks that are up several days in a row because they don’t offer good risk-to-reward. If you have to endure a 10% pullback to make a 10% potential return, the setup is too sloppy. 

There’s another theme that is starting to emerge again – travel stocks are showing relative strength. A few weeks ago Carnival Cruises (CCL) said they are seeing record bookings. Last week, Delta Airlines was very optimistic about booming demand despite higher fuel costs. As a result, other travel stocks are perking up – hotels Marriott (MAR) and Hilton (HLT) are near all-time highs. The stocks of AirBnB (ABNB) and car rental companies Hertz (HTZ) and Avis (CAR) are also looking constructively. People want to travel this year as much as possible no matter what and it is shown in the charts of the relative companies. We don’t know if this group of stocks can continue to push higher in the face of additional market weakness but their relative strength is something to pay attention to. They are likely to be among the leaders when the indexes bounce again.

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.