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I will open with a great summary riff on the health of the market from ‘Rotation Report‘…
Stocks sold off Friday on news the economy is doing too good while simultaneously selling off on news the economy is doing too poorly via AMD. That’s two Friday’s in a row where all that matters is SELL.
I call this market ‘The Dead Sea’ because it is seeking out any weakness right now.
It is going to be an interesting week in the markets. Throwing fuel on the volatile fire will be earnings starting with the banks leading the way.
I will get right to this weeks Momentum Monday video where Ivanhoff and I lay out the negative momentum that has been building up in most markets.
You can watch/listen to this weeks show right here on YouTube. I have embedded it below on the blog as well:
It is important to let the power of this negative momentum run its course.
Here are Ivanhoff’s thoughts:
We are in the sentiment cycle where good news for the economy is bad news for the stock market. September jobs number came a bit above estimates and the market sold off on Friday erasing most of its gains for the week. The Fed won’t pivot until it sees a significant uptick in unemployment or a decline in inflation. More interest rate increases mean a lower valuation for most stocks.
The silver lining from last week is that we might have caught a glimpse at the future market leaders. The second the market bounced, we saw quite a few biotech stocks try to break out to new 52-week highs. These are the future leaders of the next more sustainable bounce – be it a bear market rally or a new bull. The former is way more likely. I am not saying that biotechs won’t get hit if the general market has another leg lower. They will get hit but they’ll probably also build new bases to work with.
The other names showing relative strength lately are oil & gas. Most have had a tremendous bounce lately and are now back to their 52-week highs. It’s a big conundrum – higher oil prices mean sustained inflation for longer; Sustained inflation means Fed will continue to rise interest rates. Higher interest rates mean a higher likelihood of a recession next year. Recession means lower demand for oil & gas and therefore lower prices down the road. This is how the cycle usually goes. I don’t think the market is looking that far ahead. Oil companies are likely to report robust earnings this quarter and the market is discounting that.
The past few weeks were perforated by lowering guidance news from various sectors. AMD is the latest more notable example. Companies are actively trying to reduce market expectations. It could be because their business is really deteriorating at a fast pace or because they want to be able to surprise or at least look less bad during earnings season. The latter is knocking on the door. Everyone was afraid of the last earnings season. The fear of weaker-than-anticipated earnings reports was confirmed in many cases but the market reaction was predominantly bullish because of the expectations for Fed to pivot. Will we see something similar this time? So far, the data doesn’t confirm it. Let’s see how the market will actually react to earnings. Seasonally, stocks tend to do well past the mid-term elections which are in a month.
One thing is clear. The new earnings season will provide good opportunities on both the long and the short side. They might last only a few days. We will take what the market is offering.
Here are Charlie’s 10 charts of the week, on why ‘fear is good‘ and ‘living with drawdowns in your accounts‘
It feels like the markets have been trying to price in the higher interest rates and a recession. It also feels like there are some other shoes to drop that are not priced in and we get little warnings, like the UK pension liquidity scare. Ben Hunt has a great post up on the scary possibilities from the monetary policy here .
Keep calm this week.
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.
