Key Takeaways
- Friday’s about face should lead to an upcoming test and break of February lows
- AMZN’s outsized decline could be buyable temporarily at 3850-75
- Favorite Longs and Shorts are listed as investments to consider heading into May
Markets have reversed course after just a minor three-day bounce attempt and are now set to retest monthly lows which should happen into next week. At current levels (4158) SPX would make the lowest close since last May to close out an ugly month, which saw SPX lose over 10%, while the NASDAQ loss has exceeded 13%, the worst monthly loss since 2008. Overall, while losses are severe, it’s early to consider buying dips, and I expect a break of February lows at 4114 which should lead down to 3815-50 before finding much support. Momentum and breadth remain poor, while sentiment has not yet seen proper evidence of capitulation. At present, more and more of the Technology “Generals” have fallen by the wayside, and this is putting huge pressure on technology. Bottom line, a defensive stance remains prudent until indices can officially “washout” and show some more concrete evidence of stabilization.
Key Takeaways heading into the month of May
Investors continue to grapple with a market where Technology is very much out of favor; Yet, based on my own discussions with clients, there doesn’t’ seem to be evidence of capitulation in Tech, but rather attempts to buy dips. This might need to change before this sector can bottom, or else a meaningful reversal lower in interest rates.
The Market “Generals” are slowly but surely falling by the wayside. This began with FB and NFLX but has spread to GOOGL and AMZN. The most important stocks to concentrate on in the week ahead is AAPL, and MSFT. These are holding the market up relatively higher given their recent resilience, but holding March lows will be key. Those levels are approximately AAPL- $150 and MSFT-270. Breaks of March lows would be thought to cause capitulation.
Stagflation Anyone? Fascinating cross-currents with a poor negative GDP print this past week, while ECI (Employment Cost Index) spiked to 1.4 vs 1.1 expected. Much more is needed of course to argue that stagflation could be rounding the corner, but Friday’s economic data resulted in a very big spike in 2-year Yields and the 2’s/10’s curve flattened out.
While there is some minor evidence that Inflation could be trying to peak in various places, there remains a chronic lack of clarity for investors regarding Fed Policy, the Russian/Ukraine War, and the Economy, and outside of Cycles and Technical momentum, my view is that this is leading to the Volatility we’ve been experiencing lately. The popular quote “Markets hate Uncertainty” doesn’t seem to apply to 2022.
Technically speaking, momentum and breadth remain sub-par, but not oversold, sentiment is bearish, yet not at capitulation-like levels. The VIX remains under January peaks and the Equity Put/call ratio doesn’t seem to have spiked to levels that suggest rampant Put buying. Additionally, there remains no real VIX backwardation yet, which is normal “piece of the puzzle” towards identifying when markets might be ready to bottom. Finally, the Arms Index (TRIN) hasn’t shown sufficient downside volume on this decline.
DeMark indicators early– DeMark ratios of QQQ to SPY in relative terms still require at least another 4-5 weeks (when scanning both TD Sequential and TD Combo) before showing potential exhaustion that might lead QQQ to stabilize and reverse course higher.
This weakness directly lines up with my own cycle composite along with the Mass Pressure index, which shows weakness in Stock indices into the month of June (and might initially try to bottom by mid-May). At present, this looks clearly early from a cyclical perspective and 2022 seems to be most directly mirroring 1962.
Defensive outperformance is “the name of the game”. Only 1 SPDR S&P Select ETF sector ETF finished positive for the month of April, which is Consumer Staples. All others have closed negative for April with losses of greater than 10% in Financials, Technology, Consumer Discretionary and Communication Services. Markets need Tech and Financials to stabilize before expecting any kind of meaningful market bottom.
AMZN is nearing its first downside target, discussed last night. However, will this be a meaningful bottom?
Daily charts of AMZN show this to have cratered in Friday’s trading, undercutting lows going back since Summer of 2020 nearly two years ago. While Fibonacci targets based on the entire rally from 2008 up to 2021 show 38.2% retracement zones just 5% below at 2350-75, it remains difficult to have confidence this is ready to bottom with indices threatening a larger breakdown under February lows.
Overall, it’s difficult buying something that’s closing out the month right at its lows on huge volume near the bottom of its daily range. Normally, this signals a good likelihood of further near-term trend damage.
Bottom line, I don’t mind buying AMZN in small size at 2350-75, but the area at 1900-2050 stands out as very attractive on any larger pullback, representing a 50% absolute retracement. For now, it looks right to remain on the sidelines and/or hold off on buying dips just yet.
Consumer Staples looks to be making a big relative breakout
Interestingly enough, following a positive month for Consumer Staples, the relative chart of RHS, the Invesco Equal-weighted Consumer Staples ETF vs SPX, has broken out of trends going back since 2016, six years ago.
This should allow for additional near-term outperformance, and stocks like WMT, HSY, MO, PG, PEP, KO, GIS, KMB, K continue to offer excellent technical strength and are within 5% of 52-week highs. All of these names are relative Overweight’s during a challenging, volatile time.
Below is the weekly chart, and in the middle pane, we see Staples breaking out vs SPX. Additional outperformance likely.
Here are a list of stocks I find actionable, purely from a technical perspective. It’s up to each investor to utilize their own risk management and/or Stops if applicable. Have a great week, and Technical reports and videos will resume on May 9.
TOP Technical Longs and Shorts to favor heading into May
LONGS: WM, WMT, LLY, MRK, PFE, VLO, CTSH, IBM, CMS, SO, CB, DBA
SHORTS: BA, GE, DD, BYND, LVS, TROW, CCL, GDX, FSLR, ALGN, XHB