Our View
The S&P was 1.5% off its all-time high yesterday, but then dropped hard and closed lower by 1.4%. Like I said yesterday, the wild swings are going to persist — and now earnings season is upon us.
One of the things I learned on the floor is that the beginning of a new year can be rough and so far 2022 is off to a volatile start.
A friend emailed me yesterday and asked me, “Are we officially in a bear market? I’m getting crushed. I can’t even look at my balance. I really hope we bounce tomorrow.”
“I honestly don’t know,” I said. “One day it looks great and the next day it’s getting killed. My end of 2021 call was for a 15%+ correction and to close near the highs at the end of 2022, but it’s a total pain game as of late.”
He responded by saying, “I have lost over 50% of my 2021 profits in the first nine trading days.”
Are they hot names?
“Microsoft, Costco, Apple, and a few others.” His final remark was, “I should have heeded your advice to stay thin. Instead, I was doubling down as my stocks were falling into discount territory.”
First, even though I had the right directional call, I don’t feel good at all about something like this, but nothing goes up forever. Second, Cathie Wood’s ARKK fund is a great example of buying all the hot names and what happens when those stocks get liquidated.
At the highs, the S&P was up 120% since the pandemic and up more than 500% from the credit crisis lows.
The big jump in inflation and the Fed getting ready to raise interest rates is clearly spooking the stock market and the funds holding all the hot names are getting killed. No one knows what the stock market is going to do next, but it definitely looks like the beginning-of-the-year liquidation.
Our Lean
One of the PitBull’s favorite measures is the TRIN and he told me that as of yesterday’s close, his weighted TRIN was 89. For the markets to bottom, it should be 150.
The pops and drops are all about shaking people out. To be honest, I’m a bull, but I also know there are 11.5 months left in the year and that means there’s a lot of time for both the buyers and the sellers.
One of MrTopStep’s trading rules is to buy the late Thursday weakness and the PitBull’s rule is to buy into weakness the Thursday or Friday on the week before the expiration (in this case, that’s this week).
Yesterday the technology sector fell 2.7% and was the worst-performing sector in the S&P. It’s now down 5.5% on the year and until this type of selling lets up, it’s going to be difficult for the S&P to have any kind of sustained rally.
After a 27% gain last year, the S&P is down 2.2% in 2022 and is 3.3% off its high.
Our lean is to sell any 30- to 40-point rally in the ES and look for a bounce into the 11:30 ET time frame. If the ES holds up, we could see a late-day rally. But ideally, I want to get a look at the price action before getting too specific.
Daily Recap
After a strong three-day rally, the ES opened the 9:30 session at 4729.50, up 11 points from where it closed the day before. The index futures gyrated in the first 30 minutes; the Dow was stout, the Nasdaq was weak, and the S&P was just trying to find its place amid the mess.
In that opening 30 minute range, it hit a high of ~4736, a low of ~4725, and closed within 2 points of where it opened.
Then it got slippery. By 11 a.m. the ES had already shed 31.50 handles from where it closed at 10 a.m. and it wasn’t done going down. It did bounce about 20 points, but that only led to a lower high which then ushered in a lower low.
The ES broke 4700 as it fell another 45 handles down to the mid-4670s around 12:45. Just like it did earlier, the bulls got another 20-handle bounce, but the same pattern played out yet again: Lower highs and lower lows.
At 3 p.m. the ES broke the session low and more selling pressure commenced. The low came at 3:55 when the ES traded 4642, down more than 90 points from the high hit shortly after the open.
On the 4:00 cash close, the ES traded 4653 and then settled at 4652.50 on the 5 p.m. futures close.
In the End
In the end, it was a very rough day for the S&P, with the Nasdaq again leading the markets lower. In terms of the ES’s overall trade, it was weak like we thought it would be (remember, we were selling the rallies).
In terms of the day’s overall trade, total volume was on the high end at 1.76 million contracts traded.
As we all know, there’s no crystal ball when it comes to trading stocks, options, or futures. But the Market Imbalance Meter may be as close as it comes. Knowing how the “Big Money” is placing its bets can give our trading room a big wave to ride — or a warning sign to stay out of the water. Come check it out now, risk-free for 30 days.
Technical Breakdown
This is what I call a “shadow bear market.” Most people look at the indices to get a sense of what’s going on, but that is not even close to telling the whole story.
Countless names are enduring, 40% to 60% corrections — or more. Many of them needed and/or deserved it. Plenty of them don’t.
Energy and financials are doing well, but is that enough to prop up the whole market?
Apple and Alphabet account for $4.65 trillion in combined market cap value and are down 5.5% and 7.5% from the highs.
However, the rest of FAANG, plus Microsoft, Tesla, and Nvidia are down anywhere from 11% to 25% from their respective one-year highs.
So what the hell is keeping the S&P afloat?
The financial and energy sectors are down less than 50 basis points from the highs. Consumer Staples (XLP) is down 0.9%, Basic Materials (XHB) are down 1.2% and Utilities (XLU) are down 2.4%.
That’s where the strength is, but there are so many oddities.
Some of those scream “Defensive! Caution! Bear market!” That’s stuff like Utes and Consumer Staples.
However, banks and energy stocks are not exactly the go-to stocks to buy ahead of an impending recession.
Even more interesting is that Energy, Consumer Staples, Utilities, and Basic Materials have four of the five lowest weightings in the S&P 500 (about 13.4%). Inclusive of Financials, the total jumps to almost 25%.
However, Information Tech — which is ~8% off its high — has the highest weighting at almost 28%. Consumer Discretionary and Health Care account for a combined ~26% weighting and are down 6.6% and 5%, respectively.
The weightings have obviously fluctuated a bit, but these three sectors account for more than 50% of the S&P, yet the pain from the under-the-surface carnage remains masked. Will (or when will) it eventually show?
Game Plan
- NYSE Breadth: 44% upside volume
- NASDAQ Breadth: 70.8% downside volume
Team, I can’t explain how happy I am with some of the feedback we’ve been getting here.
Danny has been on fire with his calls on the S&Ps. We have been incredibly fortunate with how we’re navigating individual stocks, namely ARKK, GM and BIIB.
Sometimes in a tough market, it feels good just to lose small or to turn in break-even results. It’s the reality of trading: Not all weeks are winning weeks. But man, it feels great when we get through a tough stretch in the green.
Further, it puts us in the driver’s seat and lets us really wait for a slow fat pitch down the middle of the strike zone. We don’t have to swing at anything we don’t like, because we’ve already got profit in our pockets.
The lesson here: Don’t force anything — particularly on a Friday before a holiday — if it doesn’t feel or look right.
S&P 500
On Tuesday, Jan. 11, I said the S&P futures could see 4740 on the upside, assuming it could reclaim its moving averages. It gave us a high of 4736.25 and that was apparently close enough for the index.
It closed near last week’s low on Thursday and is rolling over on Friday morning.
If the S&P 500 can close above last week’s low (at 4662) and the 50-day moving average, then bulls will have made a decent stand.
Below these marks and Thursday’s low though, the S&P could have another date with the 21-week moving average and this week’s low.
Individual Stocks
I’ve rambled enough, with today’s breakdown on the S&P sectors and all. With the morning weakness, I’m essentially doing two things:
- Looking for a gap-down to see how it’s handled. That could be:
- A reclaim of the prior day’s low in the QQQ and SPY (NQ/ES) on a more shallow gap down.
- On a larger gap down, we could be looking at a situation where we crack Monday’s low, giving us the chance to reverse with a reasonable R/R.
- Lastly, we could have a Monday situation where we gap-and-fall for an hour or two and then do some sort of 30- or 60-minute reversal. If that’s the case, it lets us get long with a decent R/R and look for an afternoon bounce. It looked like this earlier in the week:
- Since gap downs are not ideal to short into, I’m looking for buy-the-dip setups in stocks and sectors that are trending higher. That includes energy and financials, but also names from our Go-To list.
- (Notice how each possible outcome, whether it’s the SPY or the stocks below, is all about maximizing our R/R).
Go-To List:
- Energy (PXD, FANG, DVN, SLB, COP, CNQ and XOM)
- Financials (KRE, ASB, TD, STL, MET, BAC)
- F (Careful though. It did give us a tag of the 261.8% extension we wanted and is now retreating. Downgraded this a.m. too).
- ABBV
- QCOM — great weekly chart.
- CAT
- BRK.B
- PG (weekly setup from the other day) 1/13
UNP (also the setup from the other day) 1/12
Disclaimer: Charts and analyses are for discussion and education purposes only. I am not a financial advisor, do not give financial advice and am not recommending the buying or selling of any security.
Remember: Not all setups will trigger. Not all setups will be profitable. Not all setups should be taken. These are simply the setups that I have put together for years on my own and what I watch as part of my own “game plan” coming into each day. Good luck!
Economic Outlook
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