Sell in May and Go Away or Ride Through the Summer?
U.S. markets (tracked by the broader market ETF, $SPY) were down 13.3% in April and at one point were down 16% in May reaching Bear Market levels, meaning down 20% off their highs. This is the steepest four-month decline since the start of 1939. Things were worse for the tech-heavy Nasdaq composite as tracked by the $QQQ, which at its worst was down 25% off its highs. The markets have rallied off these deeply oversold levels and narrowly avoided officially being called a Bear Market.
Above: $SPY is bouncing out of Bear Market territory after being deeply oversold. Measuring this latest upswing will help us see what is in store for us next. It should be able to rally to at least the lower blue trend line which lines up with a prior level of price support which will now be resistance.
Above: Any bounce on the $QQQ that does not reach the blue trendline ray would be considered weaker than expected and would be considered Bearish.
What Comes Next?
The underlying reasons behind the market sell-off have not changed. The Fed has raised interest rates 2 times bringing the federal funds interest rate up 0.75 basis points. Regardless, inflation continues to rage, and gasoline prices have hit all-time highs. War in Ukraine continues and there are serious threats to the world’s food supply. Supply chain interruptions continue to persist as China is now starting to come back online after lockdowns in many cities which interrupted the production of many important products.
Bear Markets End with a Capitulation
We just reached the point of entering Bear Market territory, yet bounced to the upside. There’s an old saying on Wall Street, “You did not get a capitulation if you have to ask if that is the capitulation”, meaning when a capitulation happens you’re going to know it.
What is Capitulation and has the Market Capitulated Yet?
Capitulation happens when investors dump a slumping security or market en masse, only to regret it soon after. Click here to learn more about capitulation.
Often after a steep sell-off in the beginning of the year financial markets will correct through time. This year the selling was more intense after entering earnings season and we started to see how inflation and supply chain problems were starting to affect company earnings. The start of next earnings season will be mid-July and that will reflect earnings for the second quarter of 2022. This is when most problems start to reach their crescendo and we can expect a reprieve in market selling; at least for the short term.
Cyptocurrency Meltdown: Loss of Confidence
Cryptocurrencies such as Bitcoin and Ethereum had a phenomenal run through 2020 and 2021. That has come to an end in 2022 as cryptocurrency started to trade with the technology index as digital assets are technology orientated. Recently we have seen the failure of Terra coin, which was a stable coin that wiped out $160 billion in perceived wealth. This “stable coin” lost 97% of its value. The U.S. dollar has negatively affected the overall perception of Bitcoin and Ethereum as a viable alternative to gold as a digital hedge vs dollar.
Above: This chart of the $GBTC is showing relative weakness as compared to the $QQQ. Crypto is now much weaker than technology.
How to Survive and Thrive in a Bear Market
A Bear Market presents many opportunities to both traders and investors.
1. Traders tend to like Bear Markets because the increased volatility provides more trading opportunities that have higher than usual risk to rewad ratios. This is because stocks go down faster than they go up. Short selling allows traders to make money on the downside by selling stocks they don’t own and buying them back at a cheaper price.
2. There are always stocks and sectors that are not participating in the Bear Market. Investors can focus on these key sectors that remain resilient. Currently, all of the oil sector is in play as well as natural gas. Food producers and fertilizer companies are also doing fairly well. Buying small amounts of shares incrementally with a long time horizon can help long-term investors get into blue-chip stocks at a discount.
As an example, you can see here on MOS, the chart is still in an uptrend. For some companies and some sectors there is no Bear Market, even when the broader market is in Bear Market territory.
What about gold and silver As a hedge against inflation?
After the initial rise at the onset of the war between Russia and Ukraine, gold and silver have been holding their own against the U.S. dollar. We would expect at some point this will start to change. As the Federal Reserve interest rate hike starts to take hold companies will start to lay people off and adjust their production to a reduced amount of demand. We call this demand Destruction. When it starts to occur, gold and silver will begin to rise in value against the U.S. dollar and other fiat currencies. As the value of the U.S. economy will start to decrease in order to tame inflation, gold will hold its value. If the dollar goes down and gold holds its value it is the same as gold going higher versus the U.S. dollar. Silver follows gold but tends to be stronger in a Bull Market as it is more affordable for common people to buy and hold as an inflation hedge.
Above: Notice the MACD indicates the GLD is on the upswing.
We hope everybody had a wonderful Memorial Day weekend as we remember all those who lost their lives defending our great country. Markets will most likely continue to be tenuous and volatile this summer. When trading, please be careful as we come to the middle of July at the start of the next earnings season. Even though the market has not yet entered a Bear Market; it is rare for the markets to sell off the way they did without entering Bear Market territory in the near future. As that is often the case, let’s consider this a Bear Market bounce and trade with caution. Trade well.
What’s New from DAS
For the last almost 20 years, DASTrader.com has provided its services at the same great rate with the continued support and improvements you have come to expect from our company. In the last couple of years, the world has needed to navigate a lot of changes which have unfortunately led to prices increasing everywhere. This inflation has led us to a point where we also need to increase our prices at DASTrader.com. We have recently updated our package offerings but kept our pricing model the same as a compromise. Some users may be grandfathered into the old pricing packages however if you cancel this package, you will not get it back. Please know that we will continue to provide exceptional service to our clients and bring you all that you have come to expect from DASTrader.com. If you have any questions, please feel free to reach out to support.
While we didn’t release any production updates during the month of May, we did release beta version 5.7.0.4 for testing. In these beta releases, we implemented the following changes:
Charting
-Added checkbox to show 0% Fibonacci line.
Display
-Added “Exe” column to Orders window to display filled shares.
Montage
-Optimized advanced ladder view.
-Added 5 seconds delay to auto center bid/ask if vertical scrollbar scrolled;
-Added option to merge lv2 bars if price step is greater than 0.01.
-Added function to Zoom in/out with Ctrl+MouseWheel.
Hotkeys
-Added cancel hotkey scripts “CXL ABOVEEQAVGCOST” and “CXL BELOWEQAVGCOST” to include equal to avgcost.
CMDAPI
-Added “REPLACE” command for replacing orders.
Bug Fixes
-Bug fix – Options chain window, when tradewnd is hidden, then the area is not displaying correctly.
-Bug fix – For group windows, keyboard input sometimes only applies to last window.
-Bug fix – Chart last sale price line color can’t be configured.
-Bug fix – Horizontal lines sometimes not drawing correctly in Volume area.
-Bug fix – Can’t insert a new row when all rows are deleted in market viewer window.
Beta version 5.7.0.4 of DAS Trader Pro are available for download.
Please be sure to install the latest version of the DAS Trader Pro platform. You can do this very easily from DAS by clicking Tools > Auto Upgrade. You can learn more about the Auto Upgrade feature in our Knowledge Base.
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