Dear Fellow Trader,
It must be odd to see the S&P 500 peel higher today, while momentum turns sour. Although NVIDIA Corp. (NVDA) rallied another 30% at one point Thursday, we now have a situation where the rest of the market remains under deep pressure.
Today, 64.4% of stocks were under their 50-day moving average; 64.8% were under their 200-day moving average. The number of stocks hitting new 52-week highs hit 327. And all of them are in the industries that will take a big hit from a recession. So, today, I want to remind you about how momentum works in this environment. And why - as momentum turns negative - it's important to take shots at the underperformers.
As we know, stocks hitting their lows tend to move higher...
So let's dig in...
It's a Mad World
If you read the news today, you'd think that only NVIDIA had reported today. But the way that earnings registered... Dollar Tree Inc. (DLTR) got crushed. Meanwhile, other major names in the tech space - like Snowflake Inc. (SNOW) - which I've panned - fell 18%. There's no "AI" in "SNOWFLAKE."
If we look across the market there remains significant pressure in key industries that are pricing in recession. I'm talking about aerospace, defense, agriculture, manufacturing,banking, farm products, packaged foods, and more. Consumer-defensives - especially higher margin products - are getting hammered. Price inflation will likely start to retreat in those products - and we could see a glut of inventory (And sales) very soon.
That said, take a look at retail apparel - names like Genesco Inc. (GCO), Children's Place Inc. (PLCE), Shoe Carnival Inc. (SCVL), and Victoria's Secret & Co. (VSCO).
If consumer spending is this bad now, imagine where it will be in just a few months. These stocks are getting hammered, and no one wants to step in and bid. Even the executives aren't spending their own money on these names. What does that tell you?
If the insiders aren't buying... then they might foresee a move lower.
How to Trade Weakening Momentum
The best way to trade these names - without short selling - is to buy in-the-money, short-duration puts on these names which aren't trading at high levels of volatility. We want to tap into these names with a targeted price, so consider doing a put spread.
In the case of a company like Gap Inc. (GPS), shares fell 3% on Thursday. A trader might consider buying GPS June 9, 2023, $8.00 put (around $1.05), and selling a put for the same expiration date at $7.00 ($0.50.). By selling this spread, you define your risk and reward in a trade, and also have a breakeven level that is higher than the current price.
If the stock - at any point - moves up to $7.60, you just cut the trade, preserve your cash, and take about an 11% loss... which is good risk management. But if it keeps moving lower, you can tap into that negative momentum and make upwards of 82% in less than two weeks. Trade smarter, not harder. Join me in Flashpoint Trader to learn how.
Today's Momentum Reading
WORLD'S BIGGEST INDICATORS
Recap: The World's Biggest Indicator (Momentum) is Red
Not much of a recap here. We had negative momentum hit this morning on the S&P 500, and the Russell continues to sell off a bit. I'll be looking for a new way to trade this trend heading into next week as the market attempts to rebound and we move closer to the X date on the debt ceiling.
Long Shot Trade
Welp, that SQQQ trade didn't take. So, now what? Well, momentum is negative, and I'd say there's a good chance to mildly double down.
The Real Winners of the Chevron Deal Are
Chevron stole all the headlines with their huge $7.6 billion buyout of PDC Energy on Monday but it's PDC Energy's shareholders who are laughing all the way to the bank.
Their stock spiked on the news - it's up over 10% in the last five days...
Which goes to show that in an oil buyout boom - like the one going on in West Texas right now - you don't want to go after the firms doing all the acquiring.
You need to go after the companies that are about to get bought out because that's where the really big money can be made.
Now, if you'd been a PDC shareholder... you'd have done well on the news.
But imagine how well you could have done if you'd played the options on PDC - now we're talking about some serious profit potential.
But if you want to find out exactly how much money you could make the next time a big buyout deal like this happens you need to get up to speed on what's happening in West Texas now.
Because it's happening at an incredible clip and you don't want to miss out on a single dollar.
Cheers,
Garrett
The post What to Do As Momentum Turns Negative (I Have Some Thoughts) appeared first on Midday Momentum.
About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.