Momentum Monday…What A Mess… and Demand Will Return For Everything That Wasn’t Destined To Die.

Good morning everyone…

I am back in the real world after a glorious week on the bike with friends. I am on my way to the Bahamas right now for the FTX crypto/web3 conference which will likely mean I will be sick of crypto by Thursday.

Last night I was in London and had dinner with my good friend JP. JP is such a great friend (picked me up at Heathrow) and knows I like Indian Food, so he took me to his favorite spot out in the countryside. Oh man it was fantastic.

I got to pick JP’s brain about fintech, crypto, the banks, regulation, community, data and of course food.

Way back at the beginning of the pandemic I had JP on my ‘Panic’ podcast and he had a wonderful line about the future of business and demand …’Demand will return for everything that wasn’t destined to die’. You can listen to that podcast and get an hour of JP’s wisdom here.

One line that stuck with me from last night’s conversation is ‘this brave new fintech world has been and still is more about the ‘banks being unbanked’ versus the ‘unbanked getting banks’. I’ll probably go deeper into the conversation tomorrow.

Onwards…

Last week I was really worried about the markets getting even cloudier and here we are much lower again as we begin another week.

Last week every sector started to sell off. It sucks, but the ‘get me out’ type of selling could mean we are getting closer to an end of this correction and technology bear market.

As always, Ivanhoff and I toured the markets and you can watch/listen to the discussion here on YouTube. I have also embedded it below:

Here are Ivanhoff’s notes:

Correlations between stocks went up significantly in the past few days. Tech stocks are not the only ones under pressure. They have been joined by basic materials. Everything is getting sold; even the defensive sectors like consumer staples and utilities. I see two main reasons behind the recent weakness:

The market is pricing in an aggressive interest rate hike. Stocks went down significantly in the two weeks ahead of the FOMC meetings earlier in the year – Jan 25-26 and March 15-16. The next meeting is May 3-4th. It seems we are seeing something identical right now. Stocks bounced after the FOMC meeting the past two times.

After the Netflix earnings fiasco and lower guidance, the market is worried that other companies will report similar issues and it is pricing them in advance just in case. Remember that financial markets move based on sentiment and expectations in the short term. They often panic before they ask questions. The silver lining is that the worst might be discounted ahead and see more constructive price action after the majority of earnings reports are behind us.

Obviously, many basic material stocks are still in an uptrend. They might still find some support near their rising 50 and 100-day moving averages. It usually takes some time for an uptrend to turn into a downtrend. There is a period of clear distribution and choppiness in-between. Keep in mind that the first half of 2008 was somewhat similar to 2022. Basic materials were strong while the rest of the market was weak. At some point, even commodity-related stocks started to break down and then the entire market accelerated lower. Pay attention when correlations go to 1.0. It’s a sign of widespread liquidation.

What’s next? We are in the midst of earnings season. The next three weeks will be heavy in reporting. What I have noticed so far is that stronger than expected earnings reports are getting little to no market love – the upside gaps are smaller and they are often getting faded. See Tesla (TSLA) or United Airlines (UAL) for example. Downside earnings gaps on the other side are following through. Look at ISRG, VZ, HCA from last Friday. They all gapped down right below previous support and quickly sliced lower from there. With the risk of saying the obvious, upside earnings gaps do a lot better during bullish markets and downside earnings gaps find better tractions during bearish markets.

Other market commentary that I think is helpful this week…

Charlie B with his week in charts video here and his 7 chart Saturday post here.

Maybe the most important chart and data points from Charlie and something I touched on last week in my post titled ‘From Fear of Missing Out (FOMO) to Get Me Out (GMO) – How Does The Tech Selling End?‘ is this one: