Market Outlook |Week of 5/30 – 6/3|Time for a relief rally?
Previous Week’s Update: https://tradingextremes.com/market-outlook-week-of-5-23-5-27-7-losing-weeks-in-a-row/
S&P 500 has sold off for >7 weeks only 4 times in history!
Take a look at the table below. Since 1950, S&P 500 has sold off for 7 weeks or more, only 4 times! This shows you how historical, deep and prolonged the 2022 (I call it a market crash) sell-off is. Another interesting thing to note is that once the markets recovered, the percentage returns in the following 3 months were positive.
Does this mean the bear market is behind us and its all clear from here? Not exactly! You can’t use past occurrences in history to make an exact prediction of the future. History doesn’t repeat itself, but it does rhyme. Keep these numbers in mind when planning your next 3 months of trading. We do have mid-term elections this year and historically markets sell-off before elections. But that is still far away. I will drastically reduce my portfolio’s exposure when elections are approaching. But we will cross that bridge when get there.
Interesting data to get a sense of the slaughter
“DA MINUS 85% CLUB” image I created is no joke. To get a sense of the massacre that has unfolded in the last 6 months, I came up with 2 lists. List#1 has stocks which have lost > 50% of their value in the last 6 months (many stocks like DOCU in this list have lost 70%). List#2 has stocks which have lost 80%!! These percentages are gigantic!
The 50% list was so big that I had to apply the scan to just the stocks in the watchlist that we trade from (approx. 180 stocks). As you know our watchlist is very restrictive and only has the highest quality stocks in it. Even after doing this, look at the scale of the slaughter. All of these stocks have lost 50% of their value in the last 5 months or so.
I then took a list stocks which are optionable and have traded > $100 per share just 6 months ago. By doing this it will filter out a lot of bad quality stocks. Otherwise, this list would be pages long containing tons of low quality and low priced stocks. Even after doing that, 16 stocks still came through which have lost > 80% of their value in the last 6 months!
Market Moving Events – Another quite week
There is the usual slew of events lined up next week, but I wouldn’t qualify anything as market moving. The jobless claims which come every week is always of interest, but outside of that it is a quite week. This is good news as this will give the market an opportunity to keep going up if the upward momentum continues. Hope Senor Putin doesn’t do anything crazy next week!
Earnings next week | CRM, MDB, CRWD, LULU, RH
There are still some stocks from our watchlist reporting earnings next week, so if the markets continue up, we will have some decent trading opportunities.
Macro Analysis (VIX)
VIX has made 5 failed attempts since January to drop below 24 (i.e correction territory). Will we get a break this time? A lot of market moving/surprise type events are behind us, so if there is any opportunity for a market bounce, this would be it!
QQQ Observations (Covering QQQ this week as SPY, DIA are moving in sync)
I had pointed out last week that QQQ, DIA, SPY are all touching oversold levels and we are due for a bounce. The oversold levels are a point of interest especially on a longer time frame like 3 years. We are finally seeing that bounce. On a 3y/weekly chart, note that we got a massive rally after the markets bottomed out in March 2020 when RSI went into oversold levels. We are at a similar juncture right now. Can we get a similar bounce here? Only time will tell. But it is my job to point out these significant events and moments in time.
What to watch for in the coming week
- The descending price channel clearly seems to be broken. But 1 week is not enough to say this with confidence. If markets tank on Tuesday next week and continue the slide, then this was another bull trap.
- Shanghai lockdown is coming to an end. This is gong to be huge for the world’s economy.
- Putin has signaled that he wants to talk again. This could be another bullish development.
- if we open green on Tuesday, this momentum can continue up piercing our first resistance level at $310 and head up toward $318 which is the next resistance for QQQ
QQQ 3Y/weekly chart
Ignore typo on the chart which says 3y/daily. We are seeing a massive green candle after 7 weeks of selling. Mean reversion indicators are lining up as well.
QQQ 6M/D chart
A short time-frame chart will paint the picture clearer before the 3y chart catches up. The downward price channel is clearly broken. And we need to take out that $310 level to continue going up. DI- and DI+ are sharply pointing towards each other. DMI crossovers (if it happens) are considered extremely bullish developments, so keep an eye on that.
TNX (10 year treasury yields)
TNX which moves opposite of growth stocks finally showed some signs of weakness last week. After hitting a high of 31, it pulled back to 27. This is a good sign, but we don’t have enough information as to where it wants to go next. TNX has moved back up to 29. If it begins to show some cracks next week, that would be a positive sign for the markets.
- There are no major market moving events next week (except a few Fed speakers talking) to surprise the markets.
- If markets can maintain the upward trajectory next week, we have a real shot of a nice relief rally.
- TNX continues to slide, VIX continues to slide.
- Some interesting earnings next week could generate trading opportunities.
thanks so much for sharing your analysis with us. I am glad to here things in Shanghai are starting to open up, this will eliminate another of the big unknowns hanging over this market. Hopefully Putin wll come to his senses as well and we can bring that ugly conflict to an end as well. Thanks again, Have great memorial day weekend.
My pleasure Chris. These 5-months have been brutal to say the least. All of us deserve a break, and I feel it is coming.
This analysis is well researched, put together and most helpful.
Understanding historic cycles that rhyme somewhat soothes the pain of the last 5 months.