The bear market rally started on Thursday when CPI posted below expectation at the still-high 7.7% level but it was a little bit below mainstream estimates. This was enough to spark a rally of epic proportions, just like the one we saw in early summer. That rally that started in late June lasted until mid-August and brought some significant opportunities, especially among the most shorted names at the time. Are we currently experiencing something similar?
Stocks that were hit were companies whose numbers came in below expectations with the worse rallied the best, especially, with financially troubled companies. These included Palantir, Lyft, Take-Two Interactive, Disney, Upstart, and Roblox. Afterward, many of these stocks rallied sharply. At the time, a short-squeeze wave, riding a wave of Reddit posts, lifted all boats. The might be the play— short interest plays — trending until the end of the month.
Now, if there’s a second stage, the new leaders step up and outperform. The one drawback of the current push higher is that metals and other commodities are leading which means that inflation expectations will remain elevated and the Fed hawkish. The last FOMC meeting for the year is on Dec 14th. I suspect, most stocks will rally until then. Maybe, there could be a selloff in a week or so before it as some market participants will expect the Fed to remain on its current tightening warpath and take profits preemptively.
Regarding inflation, crude oil remains stuck in a range, and its resolution will significantly impact future inflation prints.
Other significant events:
>> Solar jumped after California’s new proposal was more industry-friendly than initially expected.
>> Signs point to a lackluster China Singles Day. When things are going really well, you can count on China to let you know. However, when things aren’t going as well as expected, there are crickets. Since the Chinese e-commerce giants, Alibaba and JD.com, have declined to release sales numbers for their largest annual shopping event, many speculate it was a dud.
>> And, last but not least, another consequence of the Covid pandemic, is the rise, and collapse of cryptocurrency. A world punch crunch on free money with inexperienced traders was an accident waiting to happen. [ Cue Elvis: When Fools Rush In. ]
As noted weeks previous, the signs were in for a potential buying climax in the greenback.
Inflation is starting to come down but remains way above what the Federal Reserve deems acceptable. That means monetary policy isn’t likely to change anytime soon, and rates will stay higher for longer, as Powell said last week.
But…what ultimately mattered was not the big-picture policy stuff. What appeared to take precedence today was that the positioning of market participants into this report was very negative. The news has been filled with tech stock disasters, the crypto markets exploding, and anxiety about the midterm elections. And because of that, this one slight positive was able to generate enough momentum to squeeze the many shorts in risk assets and treasuries.
What’s more, it’s worth noting there was some international inflation news as supply chain issues abate. For example, China’s producer price index fell for the first time since December 2020. And the European Central Bank believes peak inflation ‘is almost within reach.’
The FED is in control of the markets right now and they continue to indicate more rate increases are coming. It’s interesting to read that many growth-oriented investors are taking shelter in one-year T-Bills paying 4.9 percent.
Inflation is sticky and the Fed will have to remain on its current course of raising interest rates and reducing its balance sheet. When the Fed removes liquidity from the market, most stocks are likely to get a lower valuation. What’s more, the price action in commodities and the latest payroll report confirmed Fed’s fears.
Yet, despite the selloff in the indexes, where tech stocks were hit the hardest, we remain in a market of stocks environment. There are good opportunities on both the long and the short side. Lately, more and better opportunities are on the short side, which is natural since most stocks follow the general direction of the market.
The main indexes continue to make lower highs but they haven’t a new lower low yet. The main factor that saved the market from dropping last Friday was the decline in the US Dollar which has been highly negatively correlated to stocks this year. The message is clear. No rally in equities can sustain without the US Dollar falling. Can the latter really happen when the Fed is a lot more strict than other central banks with it comes to raising interest rates? Probably not, at least not for too long.
There are still quite a few companies left to report earnings. One of the clear trends this earnings season is the decimation of software stocks. In fact, the cloud ETF, WCLD dropped almost 6% on Friday making new 52-week lows. In the meantime, crude oil was up 5%, and industrial metals ETF, XME was up 7%. This is a typical reflation move. We will know more next week, but if the moves from Friday follow through, the market is certainly not worrying about recession just yet.
Don’t forget that midterm elections in the US are on November 8th and stocks tend to be extra volatility around in the days before and after them.
Group Themes: Gold Mining, Copper, Specialty Chemicals, Aluminum, Semiconductors, Software
Amazon, Meta, Google, and Microsoft missed their estimates and/or gave very weak guidance. They sold off and the main indexes didn’t even blink. The Nasdaq 100 and the S&P 500 still finished last week deep in the green. People wanted a “market of stocks” environment.
This is what we are having right now. While some of the mega-caps are struggling, there are plenty of stocks from various sectors that are breaking out after earnings and following through. I don’t know if this is just a short squeeze before another rug pull, but last week certainly provided good opportunities to make money on both the long and the short side, if you were nimble enough.
FOMC is this Wednesday. One can make the argument that the market is currently betting that the Fed is going to somehow pivot. Other central banks (ECB, Canada, Australia) have already said that they plan to slow down with their rate increases. The Bank of Japan is already doing more QE. Can the Fed also blink and fold? I would not bet on it, so I would expect further volatility next week.
If the market really wants to continue to rally, it doesn’t matter what the Fed is going to do or say next Wednesday. News is always explained based on the price action: —–>>The Fed raises 75bps and stocks go down – “What did you expect? They said they will keep raising”.
—–>> The Fed raises 75bps and stocks go up – “The worst has already been priced in”.
See. It is easy to come up with a viable explanation after any price move. The real question here is how do you make money or at least, how do you make sure that you don’t lose too much of it? For me personally, earnings plays have been working well on the day of earnings and as a follow-through the next day or a few days later. Some recent examples include NFLX, ISRG, SHOP, DXCM, WING, ENPH, etc.
The earnings season is still young. There are plenty of companies left to report. Fresh news leads to big short-term moves and sometimes, to big longer-term moves. In the meantime, I am keeping an eye on volatility and correlations. If two of the main three indexes (SPY, QQQ, IWM) close below their 21-day EMA, this bounce can be considered over and I’d focus on the bearish setups.
Chop. Chop. Chop. Strong Close. Chop. Chop. Chop. Now 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 compelling reason is the overall sentiment. People are getting very pessimistic. Point being, “recession” was one of the main trending topics on Twitter Friday morning. Of course, 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. Recency bias. 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.
$XBI dropped 5% in one day last Wednesday and its relative strength line has been flat-lining since August with the prospect of a continuing interet rate environment
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.
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.
Last week was a crazy week! With 182 companies reporting earnings this week will not be for the faint of heart.
The momentum remains negative and the earnings season is getting into full gear. The indexes remain well below their 200-day moving averages and the US dollar keeps rising with rates. The rising US dollar is crushing stocks and putting pressure on countries outside the USA and rising rates are putting pressure on our own debt service payments at home.
It wasn’t a big surprise that last week 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 21-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 $10, and the minimum average daily volume is 300k. Tech was hit the hardest. Semis, cloud, internet, and mega-cap tech stocks had a new YTD low on a weekly closing basis.
The new earnings season has just begun. Expectations are already low as most stocks have been declining ahead of earnings season. This doesn’t mean that valuations are still low. Another 10-15% flush to the pre-Covid high seems like a more reasonable base for a potential bear market rally. If SPY loses last week’s lows around 348, it is quickly going down to 340. If 340 doesn’t act as major support, the next level is 320.
The silver lining for the bulls: The silver is very grey and it is not shiny at all but here it goes. Last week, we saw some positive market reactions to the first reported earnings. Dominos Pizza ($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.
Stock markets shot upward on Monday, their latest move in a series of big swings after several big financial institutions reported earnings that beat expectations and Britain’s new chancellor announced a reversal of Prime Minister Liz Truss’s tax plan. This recovery on Monday marked another large move in the stock market, where big day-to-day fluctuations have become more common. The S&P 500 rose 2.6 percent by midday trading, reversing a fall of more than 2 percent on Friday, which itself came after a rise of more than 2 percent on Thursday. The benchmark index has recorded five days of moves of over 2 percent this month, with Monday on track to be the sixth, versus only two in September.
Stock markets shot upward on Monday, their latest move in a series of big swings, after several big financial institutions reported earnings that beat expectations and Great Britain’s new chancellor announced a reversal of Prime Minister Liz Truss’s tax plan.
The recovery Monday marked another large move in the stock market, where big day-to-day fluctuations have become more common. The S&P 500 rose 2.6 percent by midday trading, reversing a fall of more than 2 percent on Friday, which itself came after a rise of more than 2 percent on Thursday. The benchmark index has recorded five days of moves of over 2 percent this month, with Monday on track to be the sixth, versus only two in September.
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 as well those associated with clean energy initiatives, including energy storage. 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.
For the KOPS Watch from the weekend scans: Group Themes: Networking, Lithium Battery, Semiconductors, Commercial Vehicles
Stage 2 set-ups sorted by descending RSCharts sorted by IBD’s RS
Energy groups led the relative strength this week as Crude Oil had a strong rebound back towards the prior range lows, which helped the energy groups to form spring-type patterns and rally strongly, with 13% to 17% moves in the leading oil groups.
Due to this, the top 10 RS rankings now has 7 energy groups. With the top 3 spots all energy.
IBD’s Top 30 Industry Rankings
However, the leading subsector Renewable Energy Equipment had a negative week but managed to hold onto the top spot for another week.
Today’s rally looked different than what we’re used to seeing when we get big oversold bounces. Normally we see the stocks that have been hit the hardest on sell-offs bounce the most on big up days, but today, the gains were distributed pretty evenly across the board as we will see. But we are now in a war of attrition as the bear market is grinding on to 8 months.
The goal now is to survive with enough capital to take advantage of the next bull market. I have no idea how long this lasts but it feels like we should be prepared for something like the 31-month bear market of 2000-2002. Jus’ saying’.
Almost by design, 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 like today. So there was an emergency FOMC meeting on Monday. Naturally, there was a review by the Board of Governors of the advance and discount rates to be charged by the Federal Reserve Banks.
Perhaps, it has come to a point when federal officials might start worrying more about financial stability than inflation. Maybe it sparks a short-term rally, however, 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.
Biotechnology was the other main featured group from the weekend scans, in part due to the strong Stage 2 breakout attempts from multiple related stocks in the group on news of an Alzheimer’s drug trial success, which caused heavy volume gaps into Stage 2 for at least three stocks in the group. So it may be worth further research and monitoring of how they now develop around their gap up bars. That said, 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.
It looks like we are in a Stage 4 market and sloping down. 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 21-day exponential moving average and its 13EMA to be above its 21EMA before you participate and you can still get a nice chunk of the move at a lot lower risk. To have an uptrend we will make a higher low, and we will take out the 21-day moving average. Right now we can’t even get a relief rally to the 13-day moving average.
KOPS Watch 