If This is Only a Shakeout, This Would be a Good Spot for a Rally
Five Charts to Start the Week
Some quick reminders before we get into it since there are more of you reading this now than there were last week. First, this is my diary on the market. It is in no way shape or form investment advice. These are the conversations that I am having with myself as I take in all that is happening in the market while trying to square it with the prevailing narratives and fundamentals. I do this to give some clarity to my thoughts. If you like what you are reading, please consider passing it along to others who might like it as well.
Next, if you have an opinion, I would love to hear it, especially if you disagree with something that I am thinking. I promise you that after starting in this business as a summer intern at the New York Stock Exchange when I was 16 years old, I have extremely thick skin.
Finally, nothing I write here should be considered investment advice. It is highly likely that I have a different timeframe and risk profile than you do.
The biggest question on the minds of investors right now regarding the trading in markets over the past three weeks, especially for the high multiple growth stocks, centers on if the weakness has been to shake out all the weak hands or if it is the start of a 1999 / 2000 type top. I was just listening to a podcast where the guest compared the current environment to 1929. I always find this type of analog analysis amusing. I am not sure that it is useful beyond a blanket statement like “history does not repeat, but it often rhymes.” Ok fine, that may be true but how does that help with timing the event and how do I make money form it? As I often say, I have no idea what will happen next. I am sitting in my office right now and while I think there is a high probability that I will make it from here to the den without any incident when I am done with this note, there is a small chance that I don’t make it. What if the dog runs in front of me causing me to trip and break my leg? It could happen!
Over the course of the past few days, the cash levels in my account have been building because my risk management process has been firing off signals to raise capital. This process is there because unlike my walk to the kitchen, where the odds of an encounter with the dog are small, in the market, the odds of an adverse event are higher. And the icing on the cake, I have no idea what will trigger lower prices from here, but I am ready if that plays out! However, there are a few developments from Friday’s trading that make me think this part of the shakeout may be ending and that is the focus of the five charts to start this week.
1. The Nasdaq 100 has been one of the areas that has seen the biggest negative impact over the past few weeks. This makes sense since it is the home to many of the high multiple, mega cap stocks that have been used as a source of funds since September. On Friday, the Invesco QQQ Trust (QQQ) traded back to those September levels. At the same time, the 21-day z-score (bottom) moved beyond -2, levels seen in November and March, when rallies developed.
2. If the Nasdaq 100 has been hit hard, the ARK funds have been absolutely punished. They have been hit for all the same reasons that I have discussed as it relates to rapid moves higher in interest rates. But, my variant view is that high multiple stocks do a good job of absorbing the initial shock of higher rates and they end up outperforming over the next three - six months. The ARK Innovation ETF (ARKK) chart is going to be busy here to prove a point. The fund has traded down to the level that marks a 38.2% retracement of the March - February advance (read about why that may be important here). That level also coincides with the anchored VWAP from the March lows. My friend Brian Shannon is a big user of this indicator and he is one of the best traders that I know. Finally, the 21-day z-score moved beyond -2 as well.
3. A different ARK fund, the ARK Next Generation Internet ETF (ARKW) did everything that ARKK did, it just did them more precisely.
4. The ETF proxy for the 10-Year treasury bond (IEF) has reached an inflection point, trading into a key support zone while the 21-day z-score is nearly at a -2 reading. This is logical spot for the fund to stabilize which would cause the rise in rates to decelerate which should help the three funds we I have already discussed.
5. The dollar is a wildcard in all of this. It has been quietly building a base since the start of of the year. Except for a small group of people who have been bullish on the dollar for the entire ride lower, everyone hates the dollar. It may have been the biggest consensus short idea entering the new year. The US Dollar Index (DXY) is now trading into resistance at 92. If it fails from here, odds favor the four other charts mentioned above holding recent levels and likely moving higher. But, if the dollar breaks out, there is likely more pain for risk assets.
What does this all mean for me? Well, I put some money to work late in the day on Friday in QQQ. Not a lot. If the levels continue to hold, I will continue to add. Otherwise, my risk management process is there in case the market’s version of the dog in my path decides to show up.
*Nothing in these pages should be considered investment advice.