Momentum Monday – GO TO THE BEACH and NOT one in China

Happy Summer Monday…

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As always, Ivanhoff did our weekly Momentum Monday Zoom discussing what we are seeing, hearing and feeling about momentum and market leadership. You can watch the episode here on Youtube. I have embedded below in the blog post:

Sometime the markets don’t give you much. The best investors and the ones that keep their sanity are the ones that recognize it and stay in the game.

I have been hearing endlessly from my stream that the bad breadth will lead to a selloff. For many stocks it already has.

Along those lines, this tweet from Doug made me laugh:

Rotational traders and great stock pickers continue to have a ton of opportunities. People hopping from Lumber to Tin to OJ futures now to Uranium etc…

The China overhang is brutal. Money will be in and out and running scared in this trade for a while. China’s leadership showing off their power which is more important to them than Chinese stock prices. In an interesting ‘the enemy of my enemy is my friend’ twist, Tencent and Alibaba are opening their robes for each other ( I own both stocks but am not thrilled with this drawdown).

Here is Ivanhoff’s take summarized:

Financial markets shoot first and ask questions later. It’s in their nature. They constantly strive to be forward-looking and don’t waste time discounting any potential threat or an opportunity; often they get way too excited or way too fearful and overshoot. Here are the four narratives ranked in terms of current impact on price action:

COVID – the recent rise in new Covid cases around the world has become the major theme in the market. The so-called reopening plays have been in a downfall for several weeks now. Vaccine makers (MRNA, BNTX), big tech (AMZN, AAPL, GOOGL, MSFT, FB, etc.), Covid test stocks (QDEL, TMO, HOLX), have been showing notable relative strength. Even the VIX is starting to perk up.

Stimulus and infrastructure bills – everyone knows that the government is one scary Covid headline away from announcing another set of stimulus. This is why we haven’t really seen any significant pullback in the major indexes. Yes, market breadth has been weakening and many breakouts have not been recently following through but the dip buyers are waiting impatiently around the corner. This doesn’t mean you should be complacent and not take your losses if you are not hedged. It’s just a reminder that it’s probably not a good idea to turn overly bearish and think that stocks are about to crash. A 5-10% pullback is more likely to create a buying opportunity.

Inflation – The Fed keeps saying it’s transitory and yet, every time there’s an inflation report, it comes way above expectations. Inflation fears may not matter now too much but make no mistake, the second the market sniffs out that Covid is leaving, it’ll become front page news again and we might see another rotation – selling software and buying basic materials. We are not there now.

Earnings – the latest earnings season has just begun. All major banks crushed estimates and yet their stocks went lower. There’s no better indicator of sentiment than the market reaction to earnings results. The mood hasn’t been very enthusiastic so far. Let see Big Tech reports will change the current cautious perceptions.

Back to the breadth and sentiment, JC has the great take….

Several weeks back, we discussed the fact that new lows were non-existent across just about all of the major averages in the US.

It’s pretty hard for a market of stocks to decline in any meaningful way without an expansion in downside participation. And we just aren’t seeing any signs of this when looking through our breadth chartbooks and new low indicators – not even on shorter timeframes. This remains the case through today.

We’ve been pounding the table on our view that this is nothing but a messy market, as well as the fact that many significant risk assets are chopping around key resistance levels.

So you would think this would be an excellent opportunity for the bears to take control… But, they just can’t seem to get it done! Let’s dive into some of our breadth and sentiment indicators and see what they’re currently saying about this.

It’s clear that there has been a notable deterioration in participation beneath the surface in the US stock market in recent months even as the large-cap indexes continue to make new highs.

The market is skating on thin ice these days as less than 5% of stocks traded on both the NYSE and Nasdaq are making new 52-week highs. The large-cap averages are going to need more support than that if they’re going to sustain these latest highs. But, it also doesn’t mean we have to experience any meaningful corrective activity. Sideways is always an option…

But, where are all the bears?

In the bottom panel, we have the average of II bears and AAII bears. Notice how it’s been moving in a straight line lower for almost a year now? This means there are fewer and fewer bears on the street.

So does this lack of bears present a risk to the markets moving forward? Well, without them we have no incremental buyers… So, the short answer is “YES.”

But digging a little deeper, and what this really means is there is now plenty of room for pessimism to emerge and the current level of risk to elevate along with it.

We have new highs at the index level and a strong sense of optimism among investors. At the same time, these characteristics must contend with weak breadth, a lack of confirmation from internals, and an absence of pessimism.

This raises the possibility of a sentiment unwind which we may very well see if prices begin to falter… And this shouldn’t come as any surprise considering all the overhead supply we’re seeing within equity markets.

Howard here again…I sense people will get a good chance to buy their favorite technology stocks lower when the bears get louder and more confident.

Have a great week everyone.

Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. For full disclosures, click here