Market momentum is Green. We had a positive switch on Tuesday, but now the markets are rolling over after Alphabet (GOOGL) announced plans to freeze hiring. This could be a short-covering rally followed by another potential leg down.
Following the surprise gains in Bitcoin over the last week, it’s no surprise to see that momentum and speculation have returned to this market. On Tuesday afternoon, we saw broad market momentum turn positive. For most traders and investors, that makes little sense, right?
After all, housing numbers look horrible. We have speculation around a 100-basis point hike next Wednesday. The Atlanta Fed and Bank of America believe we’re in a recession… and most banks are downgrading stocks left and right. Ah, yes. But keep one thing simple. “The economy is not the market… and the market is not the economy.”
It’s not surprising to see the S&P 500 rally. But it is surprising to watch so many stocks with no business rallying pop. Look at Workhorse (WKHS), the manufacturer of electric vehicles that just can’t turn a profit. Shares popped 18% today. Then there’s Charge Point (CHPT). It’s THE WORST. It’s unprofitable. It trades at nosebleed levels. And it rallied as much as 10% on Wednesday.
How about ARK Innovation Fund (ARKK). Cathie Wood’s dumpster fire of an “innovation” fund is now up 10% over the last five days. While I want nothing to do with it over the long-term, I’m happy to buy calls on this thing while we’re in some positive territory.
Of course, that positive territory likely won’t last long. We have positive momentum periods lasting four to eight trading days in 2022. The last was May 24, and it quickly reversed again on June 8.
We had a positive switch on January 28, when executives purchased the largest amount of stocks dollar-for-dollar compared to shares sold since April 2020. Momentum went negative again on February 12. And our March 16 rally that started after the Fed’s first meeting of the year… ended up turning negative again on April 5. So, I’m not looking for a long time. I’m just looking for a good time with momentum.
The Next Leg Down
Today, Fairfield Strategies announced that this rally wouldn’t last too long either. During an interview with CNBC, the firm’s founder said that stocks would push under June lows later this year. I agree with that sentiment. The combination of rising interest rates, high valuations, and recession fears makes any market trader worry.
But add on the dollar’s strength and concerns about a credit crisis in various nations, and we have more downward pressure presenting itself. One thing I’d like to add is that the latest rally comes on the heels of leveraged and hedge funds being deeply overcommitted to shorting the market. Just a little bit of a rally can quickly spur a short squeeze.
It should be no surprise that the most shorted stocks today are rallying.
Problems in the Energy Sector
Finally, I’ve received a lot of questions about the state of the energy sector. Momentum in the energy sector has been negative since June 8. The ongoing demand destruction in the United States due to high gasoline prices AND COVID-19 lockdowns in China are making it tough on energy companies.
Gasoline demand is now so low, that it currently sits where we were two years ago when drivers weren’t on the road during COVID. The ongoing demand destruction is so serious today that inventories increased in the U.S. last week by 3.5 million barrels.
Naturally, that drop at the pump has many people speculating that we will see a decline in the July Consumer Price Index (CPI). I urge some caution there as we have seen an explosion in rental prices for apartments and homes over the last year. Those figures tend to lag, and we may see CPI prints north of 8%, thanks to higher rents, in July and August.
Still, the energy sector has to sort itself out. I continue to say that you need to pick entry points on stocks you want to own. Think Devon Energy (DVN). At $45.00 per share – which you can achieve with credit spreads – DVN would pay north of 8% in a dividend.
Or Occidental Petroleum (OXY). If you are assigned shares at $55, you’d pay less than what the CEO paid a few weeks ago and well under what Warren Buffett has paid in building his new position.