The Resistance matters

When a stock breaks well-defined support, then that support becomes the resistance.

In my article, Reading S&P500, I mentioned about 4100 as the key resistance and how the market can fool everyone with rise. Yesterday, it rallied to levels near 4100 creating short-term enthusiasm and today got a perfect excuse to sell off. S&P 500 is down 3% now and Corporate America is warning about inflation and economic slowdown with absolute clarity.  The sell-off has been steep and the traders who bought the market yesterday learned the lesson again. It’s a bear market where you don’t buy the dip but sell the rally.

 

Target spoils the mood and confirms the obvious

Wishful thinking is a bad idea. Inflation is not going away and it’s eating into companies’ margins in a very impactful way. Yesterday, Walmart indicated that and today Target confirmed it. No wonder Target stock is down 24% and it’s hitting every retail stock be it Walmart, Costco, Best Buy, Dollar Tree, or Kroger.

The most disturbing thing is how quickly gains disappear. Costco was one of the best-performing stocks till a month back and now all the gains are gone. Retail stocks in the Dow are responsible for 172 points of the index’s decline.

The Inflation winners

1. TJ Maxx; 2. Burlington and 3. Ross Stores. These companies sell branded merchandise at a discounted price.

All three stocks are up today, thanks to a strong earnings report from TJ Maxx. TJX reported net sales of $11.4 billion in the first quarter, up 13% year over year. What surprised the market was the great execution on the pricing side to manage costs and deliver the net profit above estimates. It seems the market is not wrong in thinking that these companies have better pricing power as more shoppers look for discounted merchandise.

Will I buy any one of them? Nope

There is no place to hide now

When fund managers worry about the economy and recession, they tend to buy stocks like Coke, Pepsi, and P&G as they not only have the safety of low volatility but also a healthy dividend. But here’s the problem – these stocks formed a double top and now selling off aggressively. Example: All three are down 4% today and the price action looks very bad. They have formed a double top and selling off. This is Coca Cola stock price action

One stock I like in the current market environment: Southwestern Energy SWN

Southwestern Energy, natural gas exploration and production company, is a play on higher natural gas prices. The stock has the right fundamental tailwind along with a bullish price structure. The stock is trading at a PE of less than 5, extremely attractive. The stock is a buy between 6 and 7

The stocks I will buy and hold in the current market environment:

1. United Airlines
2. Southwestern Energy
3. Aspen Technology [Removed]

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