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Momentum Monday - Pullback with a side of chop
Howard Lindzon
August 07, 2023
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Good morning.
Another big week of earnings ahead.
Before I get started, yesterday I gave a bad link to the excellent Lefsetz piece ‘Throwing Articles On The Stage’. Hope you enjoy it.
Last week ended with a weak $AAPL stock and I found this chart that showed as goes Apple so may go the market:
Ivanhoff and I discuss Apple and what we see in this weeks episode. You can watch this weeks episode right here on YouTube. It is easy to subscribe and if you do every Sunday you will get an alert when we post the show.
Chapters:
Some other charts that summarize what we are seeing:
The massive Federal Government interest rate expense:
I worry that there is too much speculation but in a ‘degenerate economy’ rates not might matter as speculation becomes entertainment. That said, unprofitable and bankrupt stocks have run very far, very fast:
Software stocks which led the last. bull market as a group can’t get their mojo back and now may be tipping over:
Energy stocks may be having a moment relative to the tech stocks. I am always long $QQQ but do own some $XLE as well right now:
Hopefully longer term rates had a false breakout and the reversal of last week sticks. I’m watching this closely:
And last for today…JC pointed out that this would be the time - at least technically - to see the commodities reassert themselves versus stocks:
Here are Ivanhoff’s thoughts:
The rating agency Fitch downgraded the US credit a notch. The US government is not considered a risk-free borrower anymore. The move rattled financial markets and potentially started a correction. Will we see a similar story to 2011 when Standart & Poor’s stripped the US from its AAA rating? Back then, the stock market was in free fall weeks ahead of the rating drop. The difference this time is that the main US indexes were within 5% of their all-time highs before the news hit the wire. Back in 2011, capital flowed to the perceived safety of treasuries. This time around, Treasuries were hammered before and after the rating announcement. Why do I even mention the US credit here? Last year, Treasuries and Nasdaq 100 were highly positively correlated. They moved together, hand and hand. This year, we saw a big divergence. Most tech stocks have managed to rally significantly in the face of rising interest rates. Can this divergence continue longer has been a question I asked for a few weeks now and the answer so far has been – yes. There are two main reasons for that:
The market doesn’t believe interest rates will continue to rise because inflation expectations have been declining.
Tech earnings continue to beat estimates by a significant margin on many occasions. All the cost-cutting that big tech companies did late last and early this year went to their bottom line. The market anticipated that and has been bidding them 6-9 months in advance.
I believe we are still in a bull market but we are currently in a pullback, choppy, range-bound mode that can last through August and September. I wouldn’t be surprised to see QQQ and SPY testing their 50 or even their 100-day moving average in the next few weeks. For me, this means focusing on short-term setups, trading less, and using a smaller position size so I limit any drawdown and frustration and be better prepared for the next trending market which is probably just around the corner.
Have a great 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. For full disclosures, click here.
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