Bear Rally – Time to Buy?

bear market rally

I hope everyone enjoyed a day off from trading. Sometimes it’s good to take a step back and recharge.

After the longest weekly losing streak since 2001, the bears went into hiding last week as the market had a parabolic move upward. Investors had the chance to digest the news that overall demand remains strong despite the increased cost of goods. Consumer spending increased due to inflation, and the job market remains strong. With signs from the Fed that inflation may have peaked and interest rate hikes are on schedule, that was all that was needed for the market to post four days in a row of gains.

Was this a bear market rally or something else?

Bear Market Rally

Last week we made a new swing high, with $425 – $430 as the next area of resistance and our previous area of resistance of $405 acting as new support.

We did break a near-term trend channel, which hasn’t happened since March. The overall market headwinds are still in place, but this could be a time for short-term bottom fishing.

Bear Market Rally

With China’s covid restrictions loosening this week, and the put/call ratio on the SPY decreasing, we could see another week of buying, but be careful of a bear rally.  It’s tempting to think we’ve hit the bottom, but the markets are still run by interest rates, inflation, and the war in Ukraine.  While the story of inflation may be getting better, that’s still relative.  The market now has to figure out how to maneuver through stagflation and a technical recession.

Looking at the QQQ, we have a similar chart to the SPY.

Bear Market Rally

We’ve had two previous attempts at a breakout, but this time the 3-period exponential moving average finally crossed over the 8-period exponential moving average.  This should provide short-term strength for us to test the 50-period simple moving average (small purple line).  

Economic Calendar This Week

Tuesday – Consumer Confidence Report – 

  • Last month the index was 107.3 and the consensus this month is 104, a drop in consumer confidence.  
  • Showing that consumers’ perception of the economy and employment conditions are weakening.

Thursday – Jobless Claims

  • The consensus is 210k new jobless claims and the 4-wk moving average is 206.75k.  
  • While above the 4-wk moving average, we’re still seeing high demand for workers and near historic low numbers.

Thursday – OPEC Meeting

  • We will hear if there will be any changes to crude oil quotas.
  • This can have an immediate impact on energy prices.
  •  

Before we get into the trade ideas, I want you to look at a chart of the percent of stocks above their 200-day moving average.

 

 

While the market has been on a steady decline since December 2021, this chart shows that the number of stocks trading above their 200-day moving average started the decline six months prior.

This chart also shows that 28.70% of companies are still trading above their 200-day moving average. There are still some companies out there in bullish trends.

Today’s trade is in the basic materials sector.

Nucor Corporation (NUE) is in the basic materials sector and manufactures and sells steel and steel products.  NUE is a giant in the industry and offers a 1.45% dividend.  The next test for NU is the 50-day moving average (thin purple line), but with a recent bounce off the 200-day, NUE is setting up for a possible uptrend.

NUE

Similar to NUE, Steel Dynamics (STLD) is in the same sector and same industry, but a smaller company and able to grow more rapidly.  Its co-founder and CEO worked for Nucor before starting his own business.  STLD offers a 1.55% dividend.

STLD briefly dipped below its 50-day but recently crossed back above it.  If it can clear the $90 resistance, it could march its way up to $100.

If you have any questions, comments, or anything we can help with, reach us at any time.

 

 

Jeff

Guest Writer, Filthy Rich, Dirt Poor
Editor, Wealthy Investor Society

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