Market momentum is green. It took six weeks, but the bottom formed. Insiders had the most substantial level of buying filings to selling filings since March 2020. We saw more robust volumes over the last three days…
The number of stocks trading OVER their 50-day moving average pushed above 30%… And more than 7,100 stocks rallied today. But there’s one more metric that I want to show you… Let’s dig in.
Rallying… Always Rallying
Today, 24 stocks on the S&P 500 finished the day up more than 5%. The number of stocks on that index falling more than 5%? Zero. When it comes to momentum, price matters most.
When you have many stocks popping more than 5% and few dropping, this signals a flow of buying into the S&P 500 stocks… And sharp declines in accelerated selling. Step back and look at the broader market momentum- all 8,500 stocks out there…
Today, 960 stocks finished up more than 5%, while just 103 stocks lost more than 5%. That’s a net move on the day of 853 stocks with massive gains.
It takes large volumes of capital to move that net figure so much higher today. It’s the clearest sign that the money that has flowed out of the market over the last six weeks is coming back into the market.
Market momentum is green. It’s time to put some money to work.
Staying Cautious Through Positive Market Momentum
I’m not pumping a ton of money back into the market. I’m being cautious ahead of Wednesday, June 1. This is the date that the Federal Reserve said it would begin to sell bonds back into the market.
The central bank plans to sell $47.5 billion back into the markets. However, the markets are betting that the Fed will flinch on its rate hikes and potentially reduce its tightening efforts to prevent a liquidity crisis in the markets.
Remember, the Fed typically engages in its Open Market Operations (buying and selling of assets) on Wednesday and announces these transactions on Thursday.
But there’s a hidden qualifier about June 2022…
There are five Wednesdays in the coming month. In a 30-day month, the odds of five Wednesdays is 2 in 7. So the fact that there is a fifth Wednesday, the Fed doesn’t have to come out of the box swinging.
We might have two Wednesdays of light selling by the Fed leading up to the central bank’s meeting on June 14-15. Then, the market could effectively reset during this period of buying out of oversold territory. Combine this with the rounds of insider buying that we’ve seen, and a short-term rally that rivals the March 14 to March 30 rally appears possible.
I remain bearish on the economic outlook. But remember that the market is not the economy and the economy is not the market.
I’m trading companies with ugly balance sheets like Nikola (NKLA) and Beyond Meat (BYND) to the upside, thanks to their short interest. Likewise, I’m riding companies like Apple (AAPL) and Microsoft (MSFT) in high liquidity rebounds should momentum remain positive next week.
And I’m buying stuff that already works with my preferred entry strategy.
When the markets engage in a positive momentum switch, it’s important not to get too greedy. Remember, a rising tide lifts all boats.
But when markets experience these short-term rallies, you might see a rotation of capital from the best-performing sectors into the sectors that have been beaten down in recent months.
In that case, look for some capital to move from the energy sector to the technology, communications, and cyclical sectors.
That said, I continue to trade the stocks that have performed well despite the negative momentum environment of the last six weeks. Of course, I’m talking about Marathon Petroleum (MPC), Valero (VLO), Occidental Petroleum (OXY), Devon Energy (DVN), and Marathon Oil (MRO).
Instead of buying shares of these stocks, consider selling puts on these stocks if there is a pullback. Let’s look at MRO. You could buy 100 shares of the stock today at $31.05. Unfortunately, that would mean you must pay $3,105 for 100 shares.
Using a cash-secured put, you might instead sell July 15, 2022, $30 Puts for $2.35.You would put aside $2,765 for the required margin and receive a credit today of $235.
If the stock moves higher, the put you sold will decline in value. The contract will also decrease as we move closer to the expiration date (this is known as Time Decay).
If the stock drops under $30, you have sold the obligation to someone to sell you 100 shares of that stock on or before the expiration date. If the stock is above $30 at the end of expiration, you keep the $235.
You could also buy a put at a lower level to protect yourself against a deeper selloff and require less margin for the position. This trade is known as a credit spread. I’ll talk more about this sort of trade on Tuesday.