Momentum Monday - Earnings Season Begins

In up-trending markets the least followed stocks with the highest relative strength are most interesting to me.

In downtrending markets, the most followed stocks with the weakest price relative strength are most interesting to me.

Some notable names,

ChargePoint ($CHPT) has 58,725 followers on Stocktwits. Last week, the EV charging network provider plunged 20% and secured its 6th consecutive negative week.

PayPal ($PYPL) has 142,905 followers on Stocktwits. Last week, the payments platform sold off 3.5% and closed at its lowest price since July 2017.

Bellring Brands ($BRBR) has 253 followers on Stocktwits. Last week, the protein provider powered to an all-time high. Bellring includes brands like Premier Protein and PowerBar.

Fastenal ($FAST) has 2,608 followers on Stocktwits. The fastener and tools distributor flew 7% following Thursday’s earnings report. 

Click here for the full weekend review. 

We had a 4-5-day bounce which lifted most stocks in the face of increasing inflation numbers. The consensus opinion was that the major indexes rising on bad news is how markets bottom. Sprinkle a follow-through day and a favorable seasonality and one can understand the excitement. The tech sector led the way until a treasury bond action saw a weak demand on Thursday and rates spiked again. Rates are currently highly negatively correlated with stocks. This hasn’t always been the case but this relation is what moves markets now. It’s hard to have a sustainable rally without rates pulling back. Since August, every small bounce lasted a week or so and it was met by selling that led to lower highs and lower lows. This pattern hasn’t changed yet. Until it does, seasonality is irrelevant.

Now we have another factor at play. Geopolitical concerns have caused a bid in oil, gold, and military stocks like LMT, NOC, KTOS, AXON, SWBI, etc. Few want to be aggressively long without a hedge when a new war conflict is brewing. This is understandable. This is why markets have been so volatile. What matters is how we approach and read this tape. There are obviously new themes that are appearing and old ones that are waking up. Narratives move markets so we have to be aware of them.

The current consensus is that if the stock indexes rally for the remainder of the year, large-cap tech stocks will continue to outperform. They’ve done so all year. The so-called magnificent seven have had a great year and are still looking much better than the rest of the market. Here’s the current YTD return of those stocks: NVDA +211%, META +162%, TSLA +104%, GOOGL +56%, AMZN +55%, AAPL +38%, MSFT +37%. This is where money hides when there are very few growth stocks and they are not performing especially well. The mega-caps rising is a defensive market move. They are swimming in cash and cash is finally earning a decent yield.

Energy is still the leading sector. The recent rise in oil & gas prices is certainly helping but I am not sure how sustainable it is. Before things escalated in the Middle East, oil was hit hard with expectations that a recession would reduce demand. Everything changed overnight. It’s hard to predict what happens next. Energy stocks have been super volatile and not easy to trade.

Gold and gold miners have been mocked for a while. They are among the best performers in the past week or so. Can they follow through and they’ll keep making lower highs and lower lows?

Can defense stocks follow through? Most have been under pressure for most of the year but the war drums have awakened them and reminded that the world will keep spending more on defense in the coming years and probably decades.

Cybersecurity stocks were the first to break out to new highs when QQQ had a follow-through day a week ago. They are shaping up to be among the new leaders when the indexes bounce again – PANW, ZS, CRWD, PLTR, etc.

We have to adjust to the current market reality. Bounces and drops have been more frequent. Most of the trending moves have been only a few days followed by a violent reaction in the opposite direction. There are decent opportunities for active traders but they are not for the faint of heart and certainly not for those who like to trade aggressively and use a lot of margin. The smart move for most people here is to trade less and smaller until the situation improves.