The US stock market has been extremely volatile. It’s neither breaking down nor going up and most of the trades are going haywire. It’s time like these one should look at the market from a little distance to understand where the real opportunities are and which are the places to now avoid completely. Let’s trying to understand the big picture.
The Big Picture: Buy the dip at 50 dma is working
There is tremendous volatility but macro traders seem to be buying the dip when it comes to S&P 500. S&P 500 index bounced big time from 50 dma and this is big source of comfort for bullish community.
What’s causing the nervousness?
High Growth stocks were priced to perfection and they benefited from low long-term interest rates but with 10-year yields now climbing higher, it’s causing anxiety and nervousness among momentum traders. As traders are taking profits with no real demand, the stock prices in those sectors are seeing dramatic drops at least in high growth speculative stocks. The Tech heavy stocks are now an absolute no-no for new trades.
When people worry about inflation, they sell long-term bonds and this leads to lower bond prices and higher yields. The US 10 year bond yield is now trading at a new 52 weeks high of 1.42%. This is good news for Banks because they can borrow cheap (thanks to the zero interest rate policy of the Fed) and lend at a higher rate because borrowing rates are tied to 10-year yields. This has resulted in across-the-board buying in Large-cap and Regional banks.
I recommended Wells Fargo from this space at 36.5 and the stock continues to be an excellent hold in the current market environment.
Is this Churning?
It’s a market that has given ample hint that it wants to go down and yet it always recovers from the lows. There is definite churn that seems to be happening and the money is moving decisively towards beaten-down sectors of the economy. What else can explain a sudden surge in stock like Caterpillar CAT
We need to look for opportunities in beaten down old economy cyclical names. I recommended Macy’s yesterday precisely for this reason.
Fall in Covid cases = Bullish interest in The Economy reopening trade
One can clearly see strong price action momentum in Airlines, Hotels, Casino, Cruises, department stores and travel-related stocks. I was lucky to spot Trivago at 3.6 and the stock has not disappointed. Looking back, it was a mistake to not recommend aggressively when the stock pulled back to the same levels.
It’s not only Trivago, but stocks like Marriot, Hyatt H and Hilton, all making the move. I am keeping a close eye on Sabre SABR, a company in the business of travel management software. The stock is a buy on declines near 14
The confusing pocket: Old Momentum themes and Bitcoin
When the market sells off, one is naturally inclined to buy old momentum names and that works but not when the market is in state of churn. Remember, the churn means there are large number of traders looking to exit certain themes and there is not enough demand in that space. The big picture story: Use the current bullish state of the market to position for a new state of the bull market especially in the old economy stocks. Price Action gives a very decisive hint and our biases prevent us from participating in that theme. Example: I talked about bullishness in Oil stocks last week. There was a perfect opportunity in Marathon Oil MRO but I chose to ignore it. Looking back how stupid it was to not buy the stock.
Luckily I did not ignore Silver SLV and Silver mining company AG and it seems to be doing well.
Playing the beaten down names
When you are used to momentum, its tough to recommend stocks that are sleepy in nature. It means they will move for few days and then do nothing. One perfect example: Kraft Heinz KHC. It’s underowned and it has underperformed but on Feb 11, the company came out with brilliant earnings, and now the management seems to be doing all the right things. The price action is encouraging, and one can clearly see the breakout above 36. The company recently sold its Planters nuts business to Hormel Foods. It’s repairing its balance sheet and making the company healthy. Purely on price action, the stock is a buy at a current market price of 37.25 but this is not a stock that will give you 50% returns in 3 months. Having said that, you never know. This is a good stock for traders who want to buy and hold stock for some time without a desire for extreme momentum. The dividend yield is 4.3% which is not bad.
Does this all make sense?
Thinking matters a lot when it comes to trading. I hope this article will help you process the state of the market and enable you to make the right trades. Please do let me know if you could not comprehend this.
Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purposes. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers
Thanks !