Ivanhoff Capital

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In a bear market, eventually, every sector gets under pressure. Up until last week, oil and gas stocks were enjoying one of their best years. And then, they were hit hard. The Fed raised the base interest rate by 75bps and declared that its goal is to bring down inflation to under 2%. All of a sudden, the market’s main worry was not stagflation (high inflation and very low growth) but a recession (negative growth). The oil & gas sector ETF is now down 24% from its 52-week highs. Despite the drop last week, most oil & gas stocks are still in a long-term uptrend and many might have a short-term bounce near their year-to-date volume-weighted average price.

There are not many stocks left that are still above their 50 and 200-day moving averages. Lately, we have seen select Chinese ADRs and biotechs push against the mainstream weakness but overall there are just a few decent-looking long setups and none of them are really very exciting. The silver lining is that even the scariest and longest bear markets experience powerful counter-trend rallies from time to time. Market breadth has become so weak that we might be close to one. SPY is about 5-7% from major potential support near 350–340. If that level doesn’t hold, we might see a major panic selling and acceleration lower. The faster, the better. It’s always preferable to rip the bandaid quickly than to be tortured for many months by choppy down-trending price action. I am not in a rush to be aggressive on the long side but if I see signs of a bounce, I will try some long exposure. Typically, bear market bounces characterize by very high correlations, so I might just as well participate with an ETF like SPY, UPRO, QQQ, or TQQQ.

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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 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.

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 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.

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.