The Oversold Bounce

This is the worst market environment since 1940. Nothing seems to be working if you are an investor and the stop loss has been the only saving tool for traders. Nobody knows what lies ahead as everyone seems scared. No matter how great the business is, the stocks are getting sold off and there is nothing much one can do about it. Recession fears are damaging even good-quality stocks. Value stocks were rallying earlier this year but see how even Berkshire Hathaway stock has come down.

Now nothing goes down in a straight line, and the markets do bounce from time to time. Yesterday was one such day and here are a few things that deserve your attention.

1. The US Fed is serious about crushing inflation. It demonstrated that by hiking the benchmark lending rate by 75 bps, the largest single rate hike since 1994. As a result, Dow Jones tumbled 4.8% last week. Anytime the market sells off like this, there will be a feeble bounce which will get sold into. 
2. When the Fed raises interest rates, people take out fewer loans, buy less stuff, and spend less — and this decrease in demand results in lower prices, and less inflation. But this takes time as the transmission is not instant.
3. One sector where the higher interest rates make an early impact: The housing market. The sales of existing homes in May dropped 3.4%. This is the weakest reading since June 2020. Home Depot HD continues to make new lows.
4. The Food and Drug Administration (FDA) approved the Emergency Use Authorizations of Pfizer’s Comirnaty and Moderna’s mRNA-1273 covid vaccine for very young children between the ages of 6 months and 5 years. It helped Pfizer and Moderna stock make a small move but price action-wise, Moderna appears to be down and out.
5. 2022 has been a great year for Oil and Gas stocks. Exxon Mobil XOM rallied 75% between Jan and May before coming off sharply. Technically, such stocks are strong buys on a pullback but at what level: 100 dma or 200 dma? Yesterday, XOM bounced on the news of striking a deal with Qatar Energy to help them increase LNG capacity over the next few years.
6. Russia Ukraine war has made the energy crisis worse. Europe which always talks about cutting carbon emissions has now done a U-turn. Austria, Germany, and the Netherlands have announced they are lifting restrictions on burning coal to produce electricity. This is Bullish news for Coal and other commodity stocks like Uranium. The ETF URA is at support.
7. JetBlue wants Spirit Airlines and it continues to bid up the price to get the deal approved. It increased the offer price by $2 to now to $33.5/share in case. Spirit Airlines board seems unimpressed with the bid and wants to merge the company with Frontier Airlines. No wonder SAVE continues to trade near $23.
8. Roku is up 20% over the last 5 days, thanks to a partnership with Walmart. Now consumers will be able to buy products on Roku platforms while watching an ad. The concept sounds interesting and the momentum in the stock can continue.
9. When times get tough, the companies forge partnerships to benefit from each other strengths. Advertising partnership is the new thing and there is buzz that Google and Netflix are working on the same. This is no reason to buy the stocks of these companies
10. The stock where speculators made some serious money: Revlon. There is buzz that Reliance might buy out the company. It turned out to be a lottery trade.

 

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