Ivanhoff Capital

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The S& P 500 finally tested its summer lows and actually closed at new year-to-date lows at 357. The next levels of potential support are 350 and 340. Typically, nothing goes down in a straight line. It is normal to see bounces along the way. 

There will be an emergency FOMC meeting on Monday. I doubt it is because they want to raise rates sooner. It has come to a point when federal officials might start worrying more about financial stability than inflation. Decent odds that they might say something that will spark a short-term rally. Probably the market is expecting that and it might gap up on Monday. Or not. The market might also be too scared to bid up before the actual FOMC statement is released. There are rumors going around that a major international bank is on the brink of going under.

The trading world continues to revolve around macro. Every equity trader is keeping an eye on the US Dollar and interest rates. The recent moves in forex and bond markets have been of historic proportions. Pension funds in England were close to going under before the Bank of England stepped up to buy $65 Billion of gilts. I don’t see how all those increases in interest rates around the world don’t lead to more QE at some point next year or earlier. No wonder gold and Bitcoin have stabilized lately. When the US Dollar finally starts to really pull back, those assets are likely to outperform. I am not saying buy them now. Just keep a close eye on them and look for a setup.

In the midst of all the macro dislocations and relentless selling last week, one sector stood out. Biotech is still in a long-term downtrend and if there’s forced liquidation, can go lower from here. And yet, the few stocks that are showing up on the 52-week high list, gap up on good news, and high volume are from that sector. When this bear market subsides, biotech is shaping up to be among the leaders: APLS, SNDX, RXDX, CPRX, VRNA, REGN, PTCT, SRPT, RVNC, CYTK, AXSM, KDNY, VRTX, AMLX, PLRX, etc.

I don’t know at what stage of the bear market we are. We could be in the middle, we could be towards the end. The former is more likely. We are already seeing major companies like Nike down 54% from their 52-week highs made in November of 2021. This is a bigger correction than the one they had during the Great Recession in 2008/2009. Obviously, valuations are very different. Many companies are still trading at high P/E multiple and the one thing that characterizes a bear market is P/E multiple contractions, especially in the current environment of rising interest rates. What I am saying is don’t buy a stock blindly just because it is down 50%, 60%, or 80%. It can go lower and scare you out or it can go sideways for a very long time and wear you out. You don’t need to catch the exact bottom in order to participate in a bear market rally or new bull market. You can wait for a stock or a major index to go back above its 20-day exponential moving average and its 10dEMA to be above its 20dEMA before you participate and you can still get a nice chunk of the move at a lot lower risk.

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The main indexes have made three consecutive lower highs and lower lows since mid-August. The number of distribution days is growing. It seems they are headed for a test of their summer lows. Some mega-cap stocks like META, GOOGL, and NVDA already made new year-to-date lows and those are the ones that are the most sensitive to the economic cycle. 

The year-over-year Inflation keeps coming above 8%, which probably won’t change in the next few months. This would give the Fed all the excuses they need to keep raising interest rates. As the Fed keeps fixating on inflation, the market is starting to worry about a potential recession in 2023 due to Fed’s action. New credit creation is shrinking quickly as interest rates are rising. Companies that are economic bellwethers keep lowering their earnings guidance by a shocking size. The most recent examples are FedEx (FDX) and Nucor Corporation (NUE). 

While the indexes and most stocks are in a clear downtrend, there are some groups that are showing notable relative strength. Anything related to alternative energy is holding relatively well – EVs (TSLA, RIVN), solar (ENPH, FSLR, SPWR, NOVA, etc.), lithium (LTHM, ALB, etc.), others (BE, PLUG, STEM, etc.). Ironically, the only group that is holding well is the one that is expecting hefty government subsidies.

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.

The charts in this video are powered by MarketSmith

The silver lining from last week is that a relatively small bounce in the indexes was enough for many momentum stocks to break out. They spent the previous three weeks consolidating and building new bases above their 20 or 50-day moving averages. As soon as the pressure from the indexes was lifted, they rallied strong – clean energy and biotech are certainly standing out as sector leaders but there are many others that are also acting constructively. 

What was the reason behind the rally in the indexes? The US dollar pulled back slightly while interest rates stopped going up. Sentiment and market breadth had also reached extreme conditions. Everyone was overly bearish and markets tend to go in the opposite direction of the majority. We saw multiple rotations throughout the week. It started with a gap up in energy, then the momentum leaders from biotech and clean tech took the baton. And finally, the laggards shone on Friday – cloud, and anything highly shorted. 

I still believe this is a bear market bounce but those bounces can be viscous as we saw earlier in the summer. If this bear market has another leg lower, the current bounce is setting up better risk/reward entries for new shorts or put options. If I see a bearish reversal candle, I’ll probably dabble on the short side via some Put options. By a reversal candle, I mean either an intraday rally that finished near the lows of the daily range and forms a long upside wick or a big red candle that closes below the previous day’s low. 

As bearish as the macro scene is, there’s no sign of fear or forced liquidation among most individual stocks. Either the market participants should be more scared than they are or the macro threats have been mostly priced in as of now. It’s not an easy call. I can see both scenarios playing out. I will remain flexible and ready to switch between bullish and bearish based on price action. There’s no place for permabulls or permabears in the current tape. You are either nimble or you are better off being out.

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.