Weekend Report # 3
Is it getting less worse?
Last week saw more difficult trading and investing for market participants. Big breakdowns in Walmart, Target, and Ross Stores highlight weakening demand and rising costs. We got a glimmer of hope on Tuesday when the Nasdaq and Sp500 logged a follow through day and marked a possible turn for the positive. Those hopes, however, were quickly put aside with a big reversal Wednesday and a very interesting day Friday that say indexes undercut the recent lows but rally late in the day.
Ed Carson from Investors Business Daily recaps some market action last week:
“The stock market showed some promise on Tuesday, but ended up racking up another week of hefty losses. The Dow Jones Industrial Average fell 2.9% in last week's stock market trading. The S&P 500 index slumped 3%. The Nasdaq composite tumbled 3.8%. The small-cap Russell 2000 retreated 1.9%.. Target stock plunged 19.3% and Walmart stock 19.3%, both to the lowest point since 2020, on weak earnings and guidance. Ross Stores (ROST) crashed 21.9% on weak results and guidance. Dollar Tree (DLTR) and Costco Wholesale (COST), which report this coming week, plunged 19.8% and 16.3%, respectively. But the theme of rising costs and weaker demand spread beyond retail to trucking firms and even food producers, traditionally a defensive safe haven. Apple stock slumped 6.5%, its eighth straight weekly loss. Google stock sank 6.15% on advertising concerns. Tesla stock crashed nearly 14%, with several specific factors weighing on the EV giant. The 10-year Treasury yield skidded 15 basis points to 2.78%, after tumbling 19 basis points in the prior week. The retreat in Treasury yields reflects concerns about economic growth. U.S. crude oil futures rose 2.5% to $110.28 a barrel last week.”
So what to do now? (full chart notes via PDF can be found here )
Indexes- It is not a secret that we are in a confirmed downtrend. Playing anything long right now would be a counter trend trade with low probabilities of success. That being said, we are extended on the downside and could expect a rally at any moment. I know, its confusing.
Sectors- Very few areas stand out. Some put in higher lows on Friday as indexes made new intraday lows- a Strong sign of strength. However, they are in deep downtrends and not much has changed.
SMH- Semiconductors made a higher low on Friday then the general markets.
XLE/XOP/GUSH- Holding strong with GUSH and XOP trying to tighten up and breakout out
MSOS- Trying to bottom. Will be digging in much deeper in this space as there are multiple interesting, attractive names trading very cheap with strong growth prospects.
Groups- Several groups look interesting as a whole.
Shipping stocks- DSX GRIN SBLK GNK SFL GOGL EGLE
The group looks strong with SFL and GOGL trying to lead already above pivots, DSX GNK SBLK trying to move higher through there pivots and fan favorite ZIM attempting to get above 70
Resource Stocks- AR AMR ARCH DMLP
Some good looking pivots in strong uptrends as DMLP back tests the breakout level and holds, one to watch with ARCH trying to breakout of its pivot.
Energy- WES MGY COP OXY WLL EQT
Misc- LLY BMY GFS ARIS LNTH CC EVH
Macro Thoughts on Relative Strength, Leaders, and What Might Come Next
My .02 cents on the Fed (and it might not be worth that much) is they want lower asset prices across the board (been saying this for some time). They are far more concerned with inflation and credit markets then stocks prices right now. They will continue on this path until one of two things happen. 1) They catch up with inflation 2) Something breaks (as it did in 2018 when they tried to normalize). I am betting on #2.
When the Fed pivots, this will favor longer duration growth stocks that have been beaten down. There should be a big shift away from safety stocks and back into secular growth compounders. When/If this happens, the leaders of today will likely not be the leaders of the next bull market. When this shift starts to happen, it will likely start before the news is out about the Fed Pivot. We should see this in price and volume first.
Step one would be to see relative strength against the indexes. For example, Shopify and Twilio made higher lows on Friday. I am not calling for bottom fishing and I am not buying these now, but this is a trend I strongly believe you want to pay attention to. More on this in later notes, but I wanted to bring it to your attention and remind myself that growth stocks usually start to bottom before the overall markets, when news is dark and the outlook is dire. Remember, the stock market is a discounting machine that looks into the future.
Conclusion: Some groups look interesting, most do not. We are in strong, confirmed downtrends on multiple time frames. We are too extended on the downside to short and trying to time a bear market rally can be hard. This remains, in my opinion, a market that calls for patience and research. Less is more. Preserve mental and monetary capital. I am going to try and release two little research reports this week on ARIS and EVH.
I leave you with this modified quote from Jesse Livermore that I adapted to fit my style. It is from his book “How to Trade in Stocks”
“ I traded to beat the game and a big part was having the right timing. My quest was never ending: to refine and develop the pivotal point approach (entry), risk management (how wide is the stop and % risk of capital) my approach to trading breakouts and trends, finding the industry leaders and the best industry group. The game is just capital flowing. Base breakouts show this best. Group action is extremely important. These theories were all developed after much experience and effort. But it the mental challenge that is always my passion and challenge.”