Momentum Monday - Catching Up After A Quiet and Choppy Week

The tape has been choppy lately. Green days are followed by red days and vice versa. Most breakouts are fizzling quickly. If you are not nimble enough to sell on strength, you are stuck holding the bag. I don’t know if Friday’s selling was due to monthly option expiration but many stocks are looking vulnerable on multiple time frames. The odds are that most people are now bearish and the market tends to surprise the majority. Wednesday’s FOMC can bring extra volatility and lead to a change in direction.

There is a Federal Reserve meeting next week. No one in their right mind expects the Fed to cut the rates given the recent uptick in inflation and jump in energy prices. The consensus is for no change. The second most popular opinion is for a 25bps rise. I also think no change is the most likely scenario. None of that really matters. What’s important is how the market will react. Lately, the market has been searching for direction as there has been more selling than buying under the surface.

There’s a new sector rotation almost every week. The one constant recently has been the strength in the energy sector – not only oil & gas stocks but also uranium and coal. I wouldn’t chase them here. Most energy stocks are extended and currently don’t offer tight-risk entries. Financials also woke up last week. The vast majority of financials beat earnings estimates this quarter and went higher after their reports. Then August came and all pulled back. Now, they are starting to perk up again. I’ll be watching for setups.

The current tape is volatile, setups are sloppy. We have to take things one step at a time and adjust to whatever the market sends. There are still decent ideas popping up but one has to be quick to take gains. In a tape like this, it makes sense to trade less and with a smaller position size. This is not the time to be aggressive, either long or short.