Like Magic, We Rallied Again!
The Market
Just when you thought we would never rally again, we rallied. Like magic!
Just about a year ago the speculation in the market was so widespread. We all saw it, it was easy to spot. We had the SPACs, the meme stocks, biotech and every software as a service stock stretching to new highs. Earnings didn’t matter; all that mattered was the concept. All you needed to be was a disrupter and your stock flew. That’s how we ended up with 700-plus stocks making new highs on Nasdaq.
Then the air came out. February last year was bad for growth stocks. That was the first shaking of the tree we’d seen in these names since the lows of spring 2020. Keep in mind many or most of those stocks never recovered. We had a low in March that recovered and then came down again in May. After that May, low growth recovered. But this time it was much more selective in what recovered. By November, Nasdaq was at a high but there were far fewer than 700 new highs. The peak reading was around 450 new highs. The market was already sorting through and deciding which names it no longer had an interest in.
The November decline was the second wave of speculation exiting the market. And it accelerated in January. Let’s call January an earthquake in the market, meaning everyone felt it. After an earthquake, we tend to have aftershocks. We see folks sifting through the rubble, deciding what to keep and what to toss. I would call that the basing period. The earthquake was in the manner of over 1,700 stocks making new lows last Monday. The aftershocks were the remainder of the week when each day, despite a morning rally that gave way to an afternoon decline, there were never more than 1,700 stocks making new lows. The earth was resettling itself.
We have a market that got way too oversold and way too bearish. As always, the key is how quickly folks will turn bullish again. My guess is it would take weeks to get folks fully on board if we keep rallying, but if we can rally through midweek we’ll have converted many.
To recap, we are still oversold. Besides the fact that my weekend Twitter poll shows the most bulls since just prior to Christmas, I still think there is some skepticism out there. After all, the 10-day moving average of the put/call ratio hasn’t even turned down yet. I will end by noting that the Barron’s cover this weekend was all about how we should expect volatility in the market. As you know, that has been my theme for 2022. Since Barron’s has become one of the best contrary indicators out there, I fear my view is now consensus. That doesn’t mean we won’t be doing more trading this year, but I think it means January’s earthquake shock of volatility is likely to morph into aftershocks rather than another full fledged earthquake. At least for now! Resistance still sits overhead. Nasdaq’s hasn’t changed. By that I mean that mid-$350s area on the PowerShares QQQ Trust (QQQ:Nasdaq) has not been cleared. And the S&P 500 has layers and layers of resistance. Starting at 4,450 and again at 4,500, etc. I still think the QQQs are the best way to play it, especially if they can clear this area of resistance.
New Ideas
I was asked about Adobe (ADBE:Nasdaq) a couple of weeks ago, and I said it was too late to sell because there was a target right around this general area. I’d like to see the stock rally toward resistance in the $540 area now.
Today’s Indicator
The New York Stock Exchange Hi-Lo Indicator finally got oversold on Friday when it reached 0.12.
Q&A/Reader’s Feedback
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Devon Energy (DVN) hasn’t done anything wrong, but it has resistance here (and the Daily Sentiment Index for oil got to $88 again last week, having reached $90 earlier in the month). I think some sideways/corrective action would be a good way for the stock to regroup. But up here, I think the upside is limited.
Alaska Air (ALK) has a lot of work to do if it is going to eat through all that resistance it has in the mid $50s. Some sideways action between $48-$56 would at least give us a clue that the stock wanted to form a base so at $52 it is in no-man’s land.
Costco (COST:Nasdaq) hit its downside target last week when it tagged the $470-$480 area. It’s got a little gap to contend with at $500 and then some resistance at $510 and more at $530, etc. But for a trade, it ought to at least try and get into that $500-$510 zone before it comes down again.
