Momentum Monday – The Rotating Bear Market
Courtesy of Howard Lindzon
Happy Monday everyone.
This may be a major week for stocks. Will we rally? Will we ‘flush’ and follow quickly with a rally? Will we continue to melt down without a rally?
This is a big earnings week as well. Here is a link to all the big names reporting.
As always, Ivanhoff and I got together on a Zoom to tour the markets looking for momentum.
You can watch/listen to the show here on YouTube. I lay out a bunch of my scenarios about the tech bear market in the episode. I have embedded the Youtube video below as well:
Here are Ivanhoff’s thoughts:
That bear market bounce didn’t last long. SPY and QQQ rallied to their previous low where they found resistance. Then, they continued down and finished at new 52-week lows. The silver lining is that many stocks and ETFs did not make new 52-week lows alongside the indexes which is a bullish breadth divergence. This is not a reason to buy blindly; just a signal that selling is starting to weaken.
In a bear market, eventually, all stocks get hit. We saw a glimpse of that last week when even consumer staples like Costco went down more than 15% on weak earnings reports from competitors Walmart and Target. Everyone’s favorite Big-Tech stocks have also been under heavy pressure as they have become a source of liquidity for many – AAPL, GOOGL, MSFT, AMZN, NVDA, and TSLA are down 25-50% from their 52-week highs.
The issue with prolonged downtrends is that they can become self-fulfilling prophecies to a certain degree. Companies without a positive cash flow have to raise more money to survive which means diluting current shareholders. Younger tech companies that compete for talent with Big Tech, have to give their employees more stocks and options to keep them from leaving – which means again diluting current shareholders. In a way, lower prices bring more supply from both the companies and shareholders who want out. This is why most rips don’t last long during downtrends. There’s too much overhead supply.
The good news is that the market is cyclical and no trend lasts forever. Out of every bear market and economic situation, there is always a new set of winners that will set up and go on to make 5-100x returns. This one won’t be any different.
In the meantime, it pays to remain nimble (focused on really short-term trades) and with a high cash position.
Here’s how I think the three stages of a market bottom are formed:
Stage 1 – Bullish breadth divergences – the main indexes will make new 52-week lows but many stocks and ETFs won’t. This is not a reason to buy. Just a sign and selling might be getting weaker.
Stage 2 – Heavy-volume wide-spread buying – the majority of stocks and main indexes go up 5-10%+ on 3-5x their average daily volume.
Stage 3 – More and more long setups start to show up and breakouts are following through. If this does not happen, Stage 2 is likely to be just a bear market bounce and new lows are likely to follow.
Back to Howard here…
Take it slow this week. This is one of the toughest markets I have had to maneuver.
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.
As a reminder, Marketsmith (by Investor’s Business Daily) is now a sponsor of the weekly show. All the charts you have been seeing in the videos and will continue to see are from Marketsmith.
