It seems that the bears have taken control of the course. While my indicators have been oscillating lower, the market horsepower of the few kept leading higher. Much like a golf tournament where a few have an unbelievably good week, the rest of the field had an average week. As the market continued, the leaderships continued to thin out. We have just seen a market take that to the extreme. Now comes the reset.
With the optimism that was built into the market, the change in market sentiment will send a few to the portfolio hospital. The call options bought versus closed had accelerated to a level 50% higher than at any time since 2000. The move was so drastic, that defensive names pulled back as well. The concept of portfolio diversity to avoid correlation reverted to almost 1, where everything was correlated. While bonds were a ballast, the small yields aren’t enticing many new buyers.
We are at the start of a correction by my work. The market was stretched to the upside and we are now retracing some of those steps. I wrote an article on StockCharts.com covering this off. Dow Down 1000!
The 1/2 hour video included in that article is posted here for your access.
I do want to cover off the ‘What Now?’ question.
For me, trying to enter and exit high volatility is difficult if you don’t want to day trade. I wait for the setup to start improving and usually we can get into the market near the lows. The difficulty for most is waiting. There are lots of places to look. IPO names that were starting to improve. As an Example PTON Peleton was up on a down tape. Perhaps it is Uber, or Lyft or Pinterest that will be the next group of leaders.
The commodities were the first to get beaten down and will need to base before starting to work higher. With the move into electric cars, we should have massive opportunities in those areas in the coming months. We will need a 10X expansion of the power grid. Copper, Lithium, Steel, should all do well. The utilities related to that should do well also. Wind and solar also have been working but it has been selective. The ESG theme could use a reset as prices were extended there as well.
I continue to like the way the Canadian oils are setting up for a leg higher. Some of those can be traded on the US exchanges. We’ll need some stabilization there first.
Everyone will be anxious to get back into tech. While semi’s usually do lead, that would be a great area to watch and focus on the best setups as they start to improve.
I noticed that Payment systems charts were starting to weaken before this, so I would avoid thinking that the former glory will return instantly to that area.
Be cautious, but let’s start building watchlists instead of trying to rebuild the portfolio instantly.
Greg Schnell, CMT, Chief Market Strategist, GregSchnell.com