Hey 5-Star Trader,
Now that we are officially into the second month of the year, I’m using this week to reflect on January market action. What can we observe (and hopefully learn) from this volatile opening to the new year?
What began as jittery Federal Open Market Committee (Fed) worries ended with significant technical and sentiment breaks. This in turn created high levels of emotion in the market and put it in a highly reactive state as evidenced by the explosion in the Volatility Index (VIX), along with the extreme rise in the put/call ratio. While the market had been in need of a pullback due to increasingly high valuations and momentum, this pullback came in a very destructive manner that is going to be difficult to recover from fully .
While core mega-cap stocks remain in normal correction zones, high growth has gotten destroyed. Many cloud, cyber security, e-commerce, and core Covid-19 focused names are down 50% or more.
The key here is what happens next in mega-cap names. Will they stay within correction territory, or enter bear market territory? That will make all the difference. Right now, they are holding on, barely, but earnings this week is the next major catalyst that could push them in one direction or another.
The recent rallies are not particularly inspiring to me, seeing as they haven’t lasted. There has been such a significant breakdown on charts across the board that there is a lot of overhead resistance and baggage. This will make recovering from this slide difficult.
I do think there is more carnage ahead, but I also think you can’t call yourself an investor if you don’t take the opportunity to pick up stocks when the indexes are down 10-20%. The primary catalyst for me this week will be earnings.
If the January lows in the indexes break, for any reason, that is the place where I would consider it to be a major carnage zone.
Will There Be A Turnaround?
Maybe. The main thing I’m watching out for is a change in sentiment. The market needs to return to a “buy the dip” mentality. Without that, the underlying fundamentals or earnings per share (EPS) results won’t make that much of a difference.
For now, I’m eyeing top mega-cap stocks in my favorite top sectors. Some of these include Apple (AAPL), Microsoft (MSFT), Costco (COST), Advanced Micro Devices (AMD), NVIDIA (NVDA), John Deere (DE), and Caterpillar (CAT).