Ivanhoff Capital

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.

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MarketSmith powers the charts in this video

What a crazy week! It wasn’t a big surprise that both PPI and CPI came above estimates on both year-over-year and month-over-month basis. What was somewhat unexpected was the initial market reaction. Most stocks sold off hard in the pre-market on Thursday when the CPI news broke out. The second the market opened, all we saw was relentless dip buying all day. What started as short sellers taking some profits after the indexes went down multiple days in a row and gapped down; ended up with a full-scale short squeeze that brought SPY and QQQ back to their declining 20-day EMA. You know what happened afterward – quick and complete rejection on Friday. 

All and all, we saw more distribution last week. 155 stocks went down more than 10% last week. More distribution. Interest rates keep perking up which is a big headwind for tech. 22 went up more than 10%. The minimum price requirement for this universe is $10, the minimum average daily volume is 300k. Tech was hit the hardest. Semis, cloud, internet, and mega-cap tech stocks had a new YTD low on a weekly closing basis. 

The new earnings season has just begun. Expectations are already low as most stocks have been declining ahead of earnings season. This doesn’t mean that valuations are still low. Another 10-15% flush to the pre-Covid high seems like a more reasonable base for a potential bear market rally. If SPY loses last week’s lows around 348, it is quickly going down to 340. If 340 doesn’t act as major support, the next level is 320. 

The silver lining for the bulls: 

The silver is very grey and it is not shiny at all but here it goes. Last week, we saw some positive market reactions to the first reported earnings. Dominos Pizza (DPZ) and  JPMorgan (JPM) missed estimates and still went up after their earnings. Can we see something similar for the rest of the earnings season? This was the story of the last earnings season. We will keep a close eye. Every earnings season has its pattern – be it a market reaction to earnings surprises or misses, be it notable strength or weakness in a certain industry. Finding out that pattern early on is a big source of edge for the remainder of the season.

There is still a chance for the so-called follow-through day next week if the indexes don’t go below their lows from last week and rally more than 1% on volume higher than the volume of the previous day. The problem is that there’s nothing to buy. There are almost no stocks setting up above their 50-day moving averages. For me, the availability of good stock setups overwrites any follow-trough day in the indexes. Besides, correlations remain high. Most stocks move in tandem, up and down, regardless of individual characteristics. Why would you pick an individual stock in an environment like this? If you have/want to buy something on a follow-through day, using an ETF is a viable substitute. If you want more volatility, you can pick up a triple-leveraged ETF – SPXL, TQQQ, LABU, SOXL, etc. 

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The charts in this video are powered by MarketSmith

We are in the sentiment cycle where good news for the economy is bad news for the stock market. September jobs number came a bit above estimates and the market sold off on Friday erasing most of its gains for the week. The Fed won’t pivot until it sees a significant uptick in unemployment or a decline in inflation. More interest rate increases mean a lower valuation for most stocks. 

The silver lining from last week is that we might have caught a glimpse at the future market leaders. The second the market bounced, we saw quite a few biotech stocks try to break out to new 52-week highs. These are the future leaders of the next more sustainable bounce – be it a bear market rally or a new bull. The former is way more likely. I am not saying that biotechs won’t get hit if the general market has another leg lower. They will get hit but they’ll probably also build new bases to work with. 

The other names showing relative strength lately are oil & gas. Most have had a tremendous bounce lately and are now back to their 52-week highs. It’s a big conundrum – higher oil prices mean sustained inflation for longer; Sustained inflation means Fed will continue to rise interest rates. Higher interest rates mean a higher likelihood of a recession next year. Recession means lower demand for oil & gas and therefore lower prices down the road. This is how the cycle usually goes. I don’t think the market is looking that far ahead. Oil companies are likely to report robust earnings this quarter and the market is discounting that.

The past few weeks were perforated by lowering guidance news from various sectors. AMD is the latest more notable example. Companies are actively trying to reduce market expectations. It could be because their business is really deteriorating at a fast pace or because they want to be able to surprise or at least look less bad during earnings season. The latter is knocking on the door. Everyone was afraid of the last earnings season. The fear of weaker-than-anticipated earnings reports was confirmed in many cases but the market reaction was predominantly bullish because of the expectations for Fed to pivot. Will we see something similar this time? So far, the data doesn’t confirm it. Let’s see how the market will actually react to earnings. Seasonally, stocks tend to do well past the mid-term elections which are in a month. 

One thing is clear. The new earnings season will provide good opportunities on both the long and the short side. They might last only a few days. We will take what the market is offering.

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.