You know I consume the news like Joey Chestnut on Coney Island. Well, this one stopped me in my tracks...
Now, the full quote is, "It's widely agreed that financial and economic chaos will ensue."
This calls for a quick walk down memory lane...
One of the first things I learned when I came into the investment research business in 1998 was the term "Wall of Worry."
It was during the early stages of researching investor sentiment and its effects on the market, but back then, it was a powerful term.
The idea is simple; the way it works... not as much.
For a market to climb the "Wall of Worry," it needs three things: Positive fundamentals, positive technicals, and extreme pessimism.
As it turns out, this market has all three - in select places.
The Nasdaq 100 is a great example of the "Wall of Worry" trade...
We're coming out of the earnings season, and for the most part, Nasdaq 100 companies have bested earnings expectations.
Just last week, Apple Inc (AAPL) dropped a better-than-expected result on the market, helping the Invesco QQQ Trust Series 1 (QQQ) shares rally into the end of the week. This followed up positive results from Microsoft Corp. (MSFT), Alphabet Inc. (GOOGL), and Meta Platforms Inc. (META).
Sure, there have been losers on the earnings front (Tesla, Enphase, and Lucid, to name a few), but the companies in the Main Street Investor's eyes have beat the odds with a good - and some may even call it great - earnings season.
From a technical perspective, the Nasdaq 100 is in good shape, as well. The QQQ shares are trading above their 50-day moving average (MA50). That same MA50 is trading in a bullish pattern. In general, QQQ is in great shape. But there's a little catch...
Using the same technical measurement of health (above a bullish MA50), only 39 companies out of the 100 that make up the index are bullish. Another 30 are trading below a bearish-trending MA50.
Names like Tesla Inc (TSLA), Cisco Systems Inc (CSCO), Qualcomm Inc (QCOM), and T-Mobile Us Inc(TMUS) are all trading with a clear bearish lean to them.
But they don't count, since they're not the headlines of the group.
There is one of these stocks that you should pay special attention to: TSLA. It is the best representation of what could happen to the QQQ. I'll cover this on Wednesday and it will be worth your time.
So, if the QQQ appears to be climbing the Wall of Worry, what's wrong with the market?
Are you getting tired of this market's bipolar activity? Well, get used to it, because it feels like it's not going away for a while.
There was a word that I used to like to slip into a conversation whenever I could during interviews on CNBC...
This market is the perfect example of one that is bifurcated, period.
One fork of the market is represented by the QQQ, which turned in a slight loss for the week but is trading 21% higher for the year. This is because investors and traders alike have been flocking to the large-cap names as a safe harbor in this otherwise dangerous market.
AAPL earnings were the dot on the "I" for the large-cap tech names, as the company reported better-than-expected earnings results for the quarter. There were some signs of slippage inside the report when it came to iPhone sales and revenue, but the market has been happy with the beat.
The other fork in the bifurcated market is the iShares Russell 2000 ETF (IWM).
For the year, the small-cap stocks are up 0.4%. That's not a typo. With a slight push lower, the extremely important small-cap sector slips into the red AGAIN for the year.
The stark difference between these two areas of the market is what is wrong. We're still not seeing any signs of true risk-taking from investors. This is evidenced by the fact that the small-cap sector continues to not only lag the broader markets, but it's also now looking to go back into the red for the year.
Put simply, investors just don't have any confidence in the market - and why should they? Janet Yellen just told us things are going to go berserk if the debt ceiling isn't raised.
Where Does That Leave Us Entering Another Questionable Week?
Bullish Spotlight on Gold (GLD)
I've been hammering the table as a bull on Gold, and with good reason.
Let's refer back to the combination I described above:
- Gold's Fundamentals: Bullish
- Gold's Technicals: Bullish
- Gold's Sentiment: While not pessimistic, we're still not seeing overwhelming optimism toward gold as we see in other sectors, like energy and the QQQ
Last week, my Bollinger Band Squeeze reading on GLD dipped to 0.0%, indicating we are going to see increased volatility. Given the bullish trend that is in place, the volatility is very likely to lead us to higher prices on a breakout above $190.
We saw GLD do exactly that last Wednesday, as the shares traded to highs of over $191. But the late-week rally in stocks lowered GLD back below $190, giving those that may have felt left out on Wednesday another chance to grab a position ahead of what I see as a rally to $200.
I'm well on record with my bullish position of holding the September $180 GLD calls to take advantage of this long-term rally.
To be perfectly honest, GLD is one of the few things I'm bullish on at the moment.
But I'm not a gold bug, nor am I a commodity-trading enthusiast, so I can't go so far as to make the kind of prediction that you can see right here.
Gold at $5,000 an ounce is a bold statement - and with all of the research being revealed Thursday at 10 a.m., I'll be interested to see how it's backed up. I'll see you there.
Bearish Spotlight on Regional Banks (KRE)
Two weeks ago, I told you that smart money is buying protective puts on the KRE. I'm returning to that position, here's why.
Since May 4, PacWest Bancorp (PACW) went from less than $3 a share to a high of more than $7 this morning, and it looks like all of the headlines about raising capital and sales could have been nothing more than just rumors grinding out of the mill. That said, the risks are still very alive in this sector, as well as the market.
I'll put this as simply as possible: A bank (PACW, in this case) announcing it's cutting its dividend isn't a great headline.
Sure, it got the market to trade PACW shares more than 30% higher in the pre-market, but that doesn't matter to anyone except for the day traders and the Reddit crowd. I hate to tell you this, but those types of traders will walk away from this stock in just a few hours as they move on to the next "target."
How about being bullish on the potential for the SEC to ban short selling of financial stocks? Check out Monday's version of Here's How I Trade It to see how well that worked in 2008 (hint, it didn't).
No, the economic risks among the regional banks (and other financial sectors) run higher than normal right now - much higher. So you should act accordingly by positioning for it. I'm not talking about a short-term trade on the KRE, I'm talking about playing the trend with a long-dated, slightly out-of-the-money put.
The post Market climbs "Wall of Worry" despite risk of economic chaos appeared first on Penny Hawk.
About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.