Bearish Road to nowhere

The market is so oversold that it cannot fall but fundamentals are so bad that it cannot rally. This is the current state of the US market

How high S&P 500 can go?

Earlier this month, the market was hopeful that inflation numbers would soften and the Fed would turn less hawkish at the start of the month but then hot inflation reading and 75 bps rate hike resulted in a dramatic fall in the market. SPY ETF is now extremely oversold but it has an upside cap at 384. It means the market would face dramatic resistance on any upside near 3840. And if there is any +ve news flow it can rally to 3900 to fill the Gap.

Fundamentally, the market would have rallied on premise that we would see a soft landing which is no longer the case. The trend is down and the market would settle somewhere closer to 200 weeks ma which as of today stands near 3400.

There are two things that can happen: The S&P500 would rally to 3840-3900 to sell off OR S&P 500 would quickly decline to 200 weeks ma to bottom. I would prefer a quick decline so that bearish poison gets out of the system than a slow death.

When the trend is down, stocks make lower lows

Why I do not recommend stocks near lows is because they are in a downtrend and they relentlessly make lowers low till something dramatic happens. In bear market, nothing works on the long side.

XLE hammered on recession concerns

The only ETF trade that worked in 2022 was XLE Energy ETF. But it seems hawkish Fed and recession fears has resulted in aggressive profit booking in these stocks. XLE is very close to support/200 dma. Keep an eye on the ETF at current levels and if it finds support, then this can be a great buying opportunity.

The correction in Energy names has also dragged quality names like Occidental Petroleum OXY and Southwestern Energy SWN

One should watch these stocks and if they bounce from current levels, then one should look to add them

Funko FNKO – The Breakout

I never like to buy a stock that makes a move just on an upgrade but what makes this stock interesting is that it never declined during the broader market fall. It tells you how strong the stock has been all this while and the analyst upgrade just gave it a bigger push. The stock delivered strong earnings last quarter and trades at just 10 times on 2023 earnings. The stock looks like an attractive buy.

 

Is XXII the next Revlon-like lottery trade?

Even when there is extreme panic and fear, there will be some fun and games happening on some counter. Revlon turned out to be one such trade due to buzz that Reliance would buy out the company and save it from bankruptcy. Revlon rallied from $2 to $10 in just a few days. See the chart

Here’s why 22nd Century Group looks interesting? FDA is working on a new rule that calls for reduced Nicotine content in cigarettes. The company 22nd Century Group is already selling the first and only 95% reduced nicotine content cigarette compliant with the renewed federal policy.

Sometimes news flows do have a habit to spark sharp rallies in the stock. Always remember these trade can be extremely risky.

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