Momentum is Yellow – Now What?

momentum is yellow

Market momentum is yellow. Cash is still your friend, but take some calculated shots on some of the big names that have sold off in the last few weeks… We’re going to talk about how to enter positions in these environments… So, what has changed?

We saw an acceleration in buying Thursday on S&P 500 stocks in retail, technology, and communications. However, across the broad market of 8,500 stocks trading publicly, momentum is still negative.

There’s a lot to unpack in this market. So, let’s determine if Thursday’s rally is real or not. 

The Bull Case When Momentum is Yellow

We could see a short-term reprieve for these markets similar to what happened on March 16. Even at low volume levels, buying could press this market back into a positive momentum environment. 

The following factors are at play: 

  1. Institutions took a break from selling into intraday rallies. As volatility falls and we see less acceleration of selling, we could be witnessing the end of the aggressive sales cycle. That would mean that hedge funds have reached the point where they are adequately protected. The pattern for this market has been lower highs and lower lows dating back to April 4. That is effectively six weeks of significant outflows, and we may have finally hit exhaustion. 
  1. Some investors anticipate that the Fed will be more accommodative than previously noted. For example, the odds of a 25-basis point increase during the July Fed meeting went from 0% on Tuesday to 6.3% today. However, because the Fed is worried about liquidity in the market, some anticipate that the front-loading of risk will lead the central bank to abandon its full tightening in the months ahead. I don’t buy this, but you have to look at the data to see what’s happening.
  1. Many oversold sectors like retail and communications are bouncing back on aggressive buying (more on this in a moment). In addition, many investors are buying the dip as they remain flush with cash. According to the most recent BofA Fund Manager Survey, capital markets saw straight weeks of outflows. This is the biggest period for market withdrawals since 2019. In addition, investors have more cash right now than they did in September 2021. So there’s a lot of money that they can put to work. 
  1. Insiders are buying up stocks at their fastest pace in years. The number of “insider buying” to “insider selling” filings is higher than in January 2022 and is similar to the levels we saw in March 2020 and December 2018. Valuations are cheap in many sectors, regardless of concerns about a recession. As I’ve said many times before, the insiders will call the bottom for us. 

But… But… Bear… But…

Now I can sense that many people are looking at the recessionary fears and wondering how this market can rally right now.

  1. The second reading of GDP was at -1.5% on Thursday. The fundamentals of this market are still not properly aligned with the economy’s fundamentals. I think we are in a technical recession, and we haven’t had a period in our modern economics where oil prices spike to significant levels and we don’t have a recession. Consumers are cutting back, businesses are cutting back, and the dollar is so strong that our imports suffer. 
  1. Insider buying filings remain high, but total dollar amounts are lower than the selling. This is an odd situation, as insiders are scooping up stocks, but they aren’t buying hand over fist. I still think that insider buying is extremely bullish, but the fact that we see so much high-volume selling in stocks with stretched valuations has me concerned about how to address this market. 
  1. Short squeezes were the story of the day. Companies with high short float ripped today, and carried a lot of this market. It’s tough to carry a lot of “recovery enthusiasm” when a combination of a short squeeze and very low volumes across the S&P 500 and the NASDAQ. The SPY’s relative volume today was at 0.76x. 
  1. The Federal Reserve owns 25% of all U.S. Treasuries. And it will start to tighten its $9 trillion balance sheet next week – as soon as Wednesday. In this case, the Fed is draining liquidity from the market when the velocity of money remains relatively weak. Tack on that, we’re heading into a holiday weekend – with the markets closed on Monday – and I’m expecting some profit-taking on Friday. 
  1. Inflation is still high. But how high? Tomorrow’s PCE inflation gauge will set the tone for the markets tomorrow and next week. If it comes in high… we’ll have a selloff. If it comes in low, I think we’ll see a rally. This is why we like to trade in premarket hours.

When market momentum is yellow, it signals that we could soon see volumes come back into the market and institutions pull capital off the sidelines. There remain many bargains in this space and strong companies with strong potential for the months ahead. 

I’ll talk about June’s F&Z score stocks on Monday when the market is closed. So use your cash to your best advantage and look for companies you want to own. We will discuss how to build positions using cash-secured puts on Friday properly.

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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