Weekly Update: Markets Sold Off Further This Week
Good evening, and welcome to this week’s edition of Stealth Trades!
As expected, markets sold off further this week amidst a backdrop of escalating war.
The scenario we laid out three weeks ago continues to unfold as anticipated.
Internal metrics, which briefly showed signs of a turning point, continued to deteriorate this week.
The percentage of stocks below their 50 and 200-day moving averages sits at 22% and 29% respectively.
In other words, more than 70% of stocks are in long-term downtrends. And unfortunately, this number is still falling.
Yesterday, 642 stocks made relative strength new lows. Only 82 made new RS highs. In addition, 2 and 10-year bond yields are rising, and the VIX just made a new 6-month high.
This led to back-to-back distribution days Thursday and Friday on all major indexes. Distribution, another word for ‘institutions dumping stocks’, exists when the index falls significantly on above average volume.
Back-to-back distribution days is typically a bad sign. If we don’t see quick buying and a substantial movement to the upside in the first few days next week, this will likely lead to the final flush lower we have been expecting to see in the market.
The only sector showing positive performance over the last few weeks is natural gas. FCG, the exchange traded fund composed of natural gas stocks, is up 6.67% on the month.
Hess (HES), Diamondback Energy (FANG), Permian Resources (PR), and CNX Resources (CNX) are all at and trying to make new highs.
These strong moves in energy stocks are more likely a result of wars in the Middle East than they are indications of strength in the US market, however.
Natural gas prices are well off their 2022 peak still, so I wouldn’t be surprised to see a big move in some of the stocks I mentioned above.
Energy is shaping up to be a clear standout in terms of performance.
Nuclear, natural gas, and oil make up the top 3 sectors over the last quarter.
Outside of the energy space, not much looks overly attractive right now. There will be stocks that do very well and even benefit from chaotic times (like defense stocks) but as a whole, I believe the market has more work to do before the next bull can get underway.
Right now, stocks are competing with investors’ ability to park cash in short-term government bonds for a guaranteed 5% yield. That is an enticing offer, especially given the level of uncertainty.
For the time being, cash is king. I have my longer-term money sitting in money markets collecting the aforementioned 5% yield. But I’m ready to take it off the bench the moment there is a sign that buyers are back.
Best wishes for your trading,