Sell the Rumor, Buy the News
Key Takeaways
- Thursday’s sharp reversal looked like a positive, likely marking the start of a bottoming process for US stocks just as the Russian invasion has gotten underway
- Technology led on the rebound, while Defensives and Value lost ground- While just one day of trading, this rotation looks important in thinking a growth rebound can happen
- US Dollar likely to gain further ground vs many Emerging mkt currencies
Thursday’s big reversal happened to occur directly within a key cyclical timeframe that suggested a Turnaround to this recent selling is likely underway. This timeframe extends until the end of next week but should lead to a bottom in this correction from early January. While more needs to happen to gain conviction in this rally extending, (specifically getting up over 4365 in SPX and over 342 in QQQ) it looks like a step in the right direction, technically speaking. Growth showed some evidence of outperforming Thursday with huge gains in Technology, while the Defensives lagged. Breadth improved from an early 3/1 negative to finish positive on the day. While it’s difficult getting too “bulled up” over one day’s price action when prices remain under prior days’ highs amidst a negative trend with bearish momentum, I favor being long and buying dips, anticipating that markets work higher into March FOMC, and that Growth outperforms Value.
Key Positives and Negatives
Positives:
–Prices rebounded sharply from -2%+ down to finish positive on the day
-Growth outperformed Value and Technology showed good relative strength
-Technology as a group had not broken down on equal-weighted ratio charts v SPX
-AAPL, MSFT and GOOGL all rallied back to hold January lows
-Sentiment remains bearish and grew more negative on the Russian invasion
-Cycles look to be bottoming for US Equities between now and late next week
-Positive momentum divergence is apparent when seeing RSI and MACD at higher levels than January lows, despite prices being below on hourly and daily charts
-It seems to have become consensus that S&P has broken a Head and Shoulders pattern
-DeMark exhaustion looks to have signaled a confirmed reversal in QQQ vs SPY
-No real bid for Haven Trade, as USDJPY, USDCHF haven’t shown much strength for Yen,”Swissy”
-High Yield spreads have been relatively tame- Some of this might be due to Energy strength
As shown below, the NY FANG Composite + Microsoft has found support near a 38.2% Fibonacci retracement of the entire rally from 2020 which looks meaningful. Given that AAPL, MSFT, GOOGL all held January lows, on Thursday’s sharp About-face, it looks right to buy and hold “FAANG” for a bounce into mid-March.
Negatives:
Yes, its certainly not all positive and the bearish factors have to be discussed.
–Momentum remains negatively sloped on daily, weekly and now monthly basis, and MACD has just crossed over to negative given recent market volatility
-Intermediate-term breadth remains a concern. Only 34% of all SPX holding are above their respective 200-day moving averages (m.a.)
-Cycles do show a steep slide from April into July of this year. While an oversold bounce looks likely over the next 4-6 weeks, it will be tough to expect a push back to new highs right away
-Growth vs. Value on monthly charts still shows negative momentum divergence and could allow for Value to continue to outperform Growth in 1H 2022.
-US Dollar turned up sharply on the Russian invasion, and a rising DXY typically does not present the best risk/reward environment for stocks.
Overall, the ratio of Growth vs Value when approaching Style shifts from a large-cap perspective shows the possibility of a bounce over the next month after a fairly vicious breakdown. This stems from momentum turning back higher and diverging on this ratio of Ishares Growth ETF (IVW 0.05% ) vs the Ishares Value ETF (IVE -0.03% ). Thus, while growth has underperformed sharply in recent months, a turn back higher looks likely for March. We’ll monitor to see whether this is short-lived, or can extend back to highs as it progresses.
Finally, one of the more compelling ideas right now doesn’t come from Equities, but in Forex. The US Dollar’s breakout vs the Russian Ruble, which was discussed as a possibility a few days ago, happened Thursday given the Russian invasion of Ukraine, and prices closed up above 80.
This daily chart shows the six-year base of USDRUB with the last couple years representing the “Handle” part of this pattern. Thursday showed a very sharp move back to yearly highs in USD/RUB, meaning the Russian Ruble deteriorated sharply. This makes perfect sense given the geopolitical tension, and I expect the Ruble to weaken to well over 100 (which means this chart should move higher in USD/RUB). Long-term multi-year bases like this which give way to breakouts typically result in meaningful upside in the weeks and months to come. Thus, the US Dollar should continue to gain ground vs the Ruble, which means the sanctions might have a debilitating effect on Russia, or at least the perception of this should result in the Ruble losing ground. Russian equities have also borne the brunt of recent selling pressure, and the VanEck Russia ETF is now within striking distance of 2020 lows after losing more than 50% of its value during the last 17 weeks. USD/RUB is shown below, which highlights Thursday’s breakout.
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