Since the market’s nadir in April 2020, the equities and commodities markets have both been the hottest trending themes.
The pandemic brought a worldwide transition in lifestyle to remote work and quarantining at home. Hiked stimulus and unemployment benefits gave retail investors surplus spending power which was in-turn invested into the markets. Even those who had never dabbled with investing in the market before last year had the time, access, and resources to get more involved in trading stocks. Making money looked so darn easy!
And that fun continued until late February 2021, when the first of now three 10% corrections spooked pretty much everyone.
10% is considered a normal correction in that it is generally perceived as healthy since it offers investors cheaper entries. Corrections alleviate overbought conditions, shake out weak longs, and remind us to remain humble as the market will do what the market will do.
Now, we have seen a third 10% correction happen this last week on the heels of inflation data, an intensifying Israeli-Palestinian conflict, cyberattacks on the US infrastructure and a plethora of job openings without candidates filling them.
Of course, any correction will warrant an influx of doom and gloom sentiment, and the blame becomes pervasive. Two of the biggest victims of blame are surely President Biden and Federal Reserve Chair Jerome Powell. They are the easiest and safest targets for angry investors to vent to. After all, if investors cannot stay one step ahead of the market, it must be the government or central bank’s fault… Right?
"After all, if investors cannot stay one step ahead of the market, it must be the government or central bank’s fault… Right?"
I do have compassion for investors, especially the newer ones that joined the party during the COVID-19 pandemic. However, the phenomenon of the stock market and its attractors is that most feel the market owes them something. Bizarrely, many believe trading requires little to no education as stocks only go up!
I digress. Many are wondering, where is the fun in the market now?
First, we must make sure the macro lines up and that the correction is truly over. How will we know that? For starters, both the NASDAQ 100 (represented by the Invesco QQQ Trust [QQQ]) and the Russell 2000 (represented by the iShares Russell 2000 [IWM]) must get back over their 50-daily moving averages (DMA).
Second, the Transportation sector (represented by the iShares Transportation Average ETF [IYT]), which has been leading the market, must continue to do so.
Third, Semiconductors (represented by the VanEck Vectors Semiconductor ETF [SMH]), a weaker sector in the market, must hold recent lows and ideally, clear back over its 50-DMA. Finally, we must see the yields on the 30+ treasury bonds remain soft while the junk bonds, or the ultimate risk-on indicator, hold above its 50-DMA.
It really boils down to the 50-DMA.
The fundamentals are important for sure. Investors will be soothed if the conflict in the Middle East calms down, the pipeline cyber-attack proves to be a one-off incident, and the yields rising based on fears of anything other than transitory inflation reverse to stable or falling yields.
"The fundamentals are important for sure.
With so many equities oversold, the fun will return to the market if some of those classic and new tech-themed names put in an intermediate bottom and start to rise in price. Many of those companies are quite far from their 50-DMA. For example, on 11 May Palantir [PLTR] made a fresh low at levels not seen since last November. Then, last Friday, PLTR gained over 8%. If that is in fact the bottom, then big stocks like Palantir or Datadog [DDOG], 3D Systems [DDD] and even Tesla [TSLA], all of whom made new 60+ day lows, will have a lot of blue sky ahead.
Nonetheless, I cannot overstate the importance of watching the macro. The NASDAQ, the Russell 2000, Semiconductors and yields all need to play nice. Watch that 50-DMA carefully.
If the price can surpass that key moving average, it really will be Pleasure Time!
Mish Schneider is the director of trading education at MarketGauge.com. For more insights, you can follow her on Twitter @marketminute and on Instagram @mishschneider