Ivanhoff Capital

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The past few weeks’ bear market bounce was based on the premise that maybe inflation has peaked or is close to doing so. The most recent CPI numbers from Europe and the US are showing that this line of thinking might be a bit premature. 

Most stocks had their usual pre-FOMC selloff last week. Now it remains to be seen if they have their usual post-FOMC bounce. A lot will depend on how the Fed interprets the latest record inflation readings. If they panic and talk about an acceleration in interest rate increases and balance sheet reduction, we might see a further selloff. If everything remains on the current trajectory, there’s a good chance of a short-term bounce in the second part of the week. Overall the trend remains lower. Downtrends typically end in one of the following ways – either panic selling that scares you out or a prolonged sideways choppiness that wears you out.

The best-performing stocks during the latest bear market rally were the ones that held the best year-to-date (oil & gas) and the ones that were hit the worst year-to-date (mostly cloud, Internet, retailers with very high short interest). It seems that move has now ended and the market is working on new trends. One that stood out last week was the weakness in financials. The Treasuries Yield curve has become flat as a pancake and banks don’t make a lot of money in that environment. The market is clearly discounting a recession and inflation due to supply constraints in the energy space. This is also known as stagflation and it is one of the worst things that can happen to an economy. 

I remain focused on short-term trades on both the long and short sides. Buying breakouts doesn’t work for more than one day in most cases in this environment. Buying pullbacks in strong stocks and shorting rips in weak stocks have a better probability of working.

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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 current consensus is that this is just a bear market bounce. It makes common sense. All major indexes are still below their declining 50 and 200-day moving average. If everyone is expecting the current rally to eventually fizzle, everyone is trading with one foot out of the door – taking quick profits and limiting overall market exposure. Such behavior naturally leads to more intra-day and intra-week volatility, some might call it choppiness. It’s not an easy tape trade but there are certainly more bullish arguments compared to two weeks or so ago.

The bullish arguments

The positive market reaction to bad news continues – Microsoft guided lower and the tech sector rallied 3% on that day. We are seeing mostly upside market reactions to earnings – this is a big change in sentiment compared to just a few weeks earlier when almost any earnings report was greeted with a swift selloff.

There is a rotation in strength and a decrease in correlations – it seems a different sector is leading every day. Energy, especially oil and gas, has remained the strongest overall sector, but others are starting to wake up too. ARKK and IPO were up 8% on Thursday. Biotech ETF, XBI was up 3.5% on Friday while the Nasdaq 100 lost 2.6% on that same day. The trash is rising from the bottom. I don’t know if this is a sign of improving risk appetite or just a powerful short squeeze before another selling wave. 

The bearish arguments

The Fed remains steady on its quantitative tightening course which will be a major headwind for most stocks. Probably the first test of declining 50 and 200dma will be sold.

Oil stocks have been the clear winners this year. One industry’s rising revenue is often other industries rising costs. This applies with full force here. Higher energy costs basically guarantee sustained inflation and lower consumer spending. The question is how much of that has already been discounted by the market.

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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

We finally saw the bear market bounce many were waiting for. It started with a bullish momentum divergence the previous Friday and it followed with a widespread buying after the Fed minutes were released on Wednesday. The minutes didn’t say anything new – most board members are for multiple 50bps increases in interest rates and yet the stock market bounced hard. Something has shifted in sentiment and all of a sudden we saw positive market reactions to bad earnings reports. It’s anyone’s guess how long it is going to last. We will dance until the music is playing. The next major technical resistance levels are 420-430 for SPY, 320-330 for QQQ, 80 for the biotech ETF – XBI, 190-200 for the small caps Russell 2k (IWM).

The current earnings season is coming to a conclusion. The latest themes:

1. The resetting of expectations continues with full force, especially in the tech sector. Companies are either missing estimates, guiding lower, or both. The silver lining is they have managed to lower the market expectations so it’ll be easier to surprise in the future.
2. The impact of Inflation is not distributed evenly as of now. While Walmart and Target said that costs have gone up more than expected and their customers have changed their purchasing habits due to higher inflation, Nordstrom and Williams-Sonoma pointed out that their clients are not having those issues yet. It only makes sense. Higher inflation typically hits first people with less income. 
3. The most heavily shorted stocks are missing estimates, gapping lower, and then squeezing higher. We saw that in companies from various sectors – USPS, DKS, BROS, etc. This is a normal part of the market structure. Every share that has ever been sold short will have to be bought back at some point. High short interest can be a source of solid future demand. What better time to proactively cover a short position than after a prolonged downtrend followed by a big gap down on weak earnings? Granted, many of them will probably set up again on the short side in the near future.

In the meantime, anything related to energy continues to be among the price leaders. Oil &  gas stocks went up about 20% across the board last week as natural gas hit 12-year highs. Lithium stocks have also been on fire as it is needed in the clean-energy space – LTHM, ALB, LAC, SQM.

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.