Market Review: Trend is your Friend or ?

The week of July 4th is historically quiet for the markets.  With many chosing to hit the beaches or their preferred vacation haunts, its typically a tough time to find market direction.  For those of you chosing to take refuge behind your keyboards instead of pursing 2nd degree burns, here is my take of the markets.

Opportunity knocks:

I think there is a decent over-under to go long here for 3-6 month swings if chosen wisely.  As of today there is some divergence in tech related stocks as the market is suggesting there are buying opportunities.  Many tech names are beaten down 50-80% from highs and are getting bid.  With respect to overall market and the bias, it still makes sense to take on some risk on these names at these levels (SPX 377 / QQQ 283) with ~4% stops).

While I roughly weigh the likelihood of  SPY dropping to ~320 to roughly 15% in next 3 months, I sense the market is over-weighted for this drop and there is too much negative sentiment.  Yes, the drop has been very orderly, but at same time very measured and deliberate to the extent that I would be more suprised at this point if we get that huge capitulation spike with VIX rising > 45.  This is why I suspect we are buoyed to further downside and only have a 15-20% chance of more dramatic downside.  

Supporting thoughts:

Crypto:  While MOMO doesn't directly support crypto, it is a lens in to market risk.     Currently BTC is trading at $19.9k.  Technically it is in a bear pennant with zero momentum.  Believe the risks and lack of utility over the years have jaded many (including myself) and have moved funds back into equities as the opportunity feels equal if not greater.

Inflation:  Getting sense that inflation has peaked.  People have curbed driving habits and also cut back on excesses which indicates prices will have to adjust to accomodate demand.  

Cost of housing/autos: Housing market is flattening and on cusp of dropping.  Average car price is now over $700 a month.  Coupled with high inflation, discretionary income is dramaticaly lower  (Short cruise lines NCLH/RCL?  DIS? Probably not as already nearing a bottom).  Supports idea that inflation may have peaked.

Oil: WTI is off > 20% of peaks just a few days ago.  Dropping prices mean lower costs for retail, airfare, etc.  

Recession:  We are in one!  Not an "about", not an "almost".  

Enviromental:  Temperatures are through the roof and reports of extreme drought are increasing with reports of the Colorado river now being rationed.  This could be tied to increasing grocery prices as the watering restrictions reduce crops yield with also impact to meats prices (via higher feed prices).  (HVAC long term investment idea - HON, LEN)

FED: Confluence of factors will keep them a bit more tight-lipped than prior months.  They may make another rate hike as part of "the plan", but would imagine they are in data capturing mode for next several months as they don't want to over-correct.

Geo-political: From what I've read, Russia doesn't really have the type of armed forces to occupy large areas.  Missles & nukes are largely defensive and bullying tactics to force into submission.  Ukraine hasn't yielded and markets seem numb to situation over past months.  Grain impacts are pressuing inflation on top of the Covid stimi's.  Next up for market shock would be China attacking Taiwan.  However, if and when, China does attack they have lost their "threat leverage" and power to manipulate US and NATO.  

Net-net:  Still in downtrend (need SPY > 396 QQQ > 302), but those eager can take some bets here and perhaps have better risk tolerance than if waiting for trend break.  Scalps and day trades may have more legs as speculation sets in.  


Happy trading!

//Profit from Momentum