Before the Bell Jan 7

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Tickers:  SPY QQQ IWM KRE BTU HCC  Breadth  Sector Rotation

Before the Bell  is premarket prep for active traders. The note provides detailed stock market technical analysis focused on the indexes and FAAMGs. Key levels and trading locations are provided, along with trading plans and timely commentary to keep you on the right side of the trade.

Inspiration

If you live your life within a philosophical silo, it will tough to see the truth when facts on the ground change.  Same is true for we traders. Holding onto bullish or bearish narratives is dangerous. Take opinions as just that, opinions.  Price is the ultimate arbiter. It and the levels it creates are not biased. They’re the amalgamation of thoughts, hopes, dreams, and opinions of all the market participants. If you keep your focus on price and it’s levels while excluding opinions ( including mine ) your trading will make forward strides. My biggest struggles come when I listen to the little voices in my head that encourage me not to trust price or to try to outguess it. Remember one of my favorite analogies:  Be a leaf on a stream.   Blissful following the flow. Left or right, up or down, with no opinion or bias to what might be best.  Hold that thought while trading; then execute around it. An expanding P&L will soon follow. 

Earnings 

Companion Video  

The video is a detailed technical review of the indexes and FATMAAN names. All the key trading levels are identified along with commentary and trade plans for each ticker. Trade ideas are also discussed.  Run the video at 1.25x- 1.5x to reduce run time without loss of clarity.

 No video today ahead of the NFP report.    

Macro Data Releases Week of Jan 3

  • Monday –
  • Tuesday – ISM MFG, JOLTS
  • Wednesday – ADP, PMI, oil inventory, FOMC minutes 2pm
  • Thursday – Challenger Job cuts, Jobless Claims; Intl Trade in Goods & Services, Factory Orders,  NatGas inventory
  • Friday – Jobs Report, FOMC Trio of Speakers;  Daly, Bostic, Barkin

Regime change Jitters 

When cold air masses meet warm air masses, at the very least you get a line of thunderstorms. Under certain conditions you get killer tornadoes.  The Columbia Bar, where the Columbia River meets the Pacific, is nicknamed the Graveyard of the Pacific and is one of the most dangerous areas to navigate in the world.  Now as Fed policy shifts, regardless of whether the shift is long-lived or not, sets up a regime shift within risk assets.  I believe this sector rotation has the potential to be the most violent of our trading careers. Especially true if you’re relatively new to markets. If the big money boys collectively decide that their positioning is fundamentally offsides, watch out.   The doors at the Hedge Fund Hotels wont be wide enough for everyone to get out of the burning building.   That is why I think we may be on the verge of the Golden Age of the Long-short Book.  For years, Long-Short Hedgies Pros and Retail wanna be’s have under-performed trying to short almost anything as the liquidity pools blew bubbles in everything.  Now, as liquidity starts to drain, we’ll find out what’s what, and it could be epic.

Emerging Sector Rotations

Here is a 10 day rotation study.  

What’s in?   XLE / XLB / XLF / XLY / XLI Cyclicals

  • Inflation Fighters – Real-World companies with pricing power.  Consumer names with strong brands and market share will raise prices.
  • Energy & Materials – Systemic and long-standing under investment in Basic Materials and energy.   XLE as a % of the SPY is at 50yr lows down around 2%.  What if it simply goes to 25yr lows at 4%?
  • Financials – Companies that benefit from rising rates.

What’s Out?  XLK / XLU / XLP / XLV / XLC

  • Tech – Especially high-valuation / non-profitable tech. ( ARK Complex )    Biggest market risk is if the big money boys turn on the Generals
  • Ponzi’s –  Companies in any sector that are either over-valued to the point of absurdity or in fact have no path to profitability…EVER    Example: SaaS companies, despite recent rug pull, still trading at 30x sales instead of 50x sales
  • Rate Sensitive Sectors.    Folks gravitate to Utilities, Staples, and REIT’s in periods of falling rates and low inflation as bond proxies.  Inflation and rising raates destroy the value proposition for these sectors.
  • XLC – Note that I included these because GOOGL / FB are 44% of the index. But you’ve also got all that Social Media stuff in there as well.

In the days ahead, look for more rotation studies where I will drill into the Industry Groups to get further refinement on favored / unfavored groups.

Breadth

Trades about to Happen

$KRE – Regional Banks

A recent long idea to buy on the breakout above $75. We got the breakout yesterday. Now, stay long against $75.

BTU 

I like the long technical set up in Thermal Coal producer Peabody BTU. Price is carving out a bull flag above the 50ema at $11 and technical resistance at $12.  IMO it is a technical buy on a breakout above $12 but traders can also pre-position long against the 50ema at $11.  BTU can be a volatile stock so if you get involved, you’ll need some patience and likely wider stops.

HCC 

Met coal producer Warrior HCC is also shaping up w/ a powerful bull flag set up. A bull flag breakout above $26 projects a move north of $30.  Set yourself an alarm just above $26 and be ready to go if it pops.

INDEX CHARTS

A detailed walk-through of the levels and trading strategy for the indexes is given in the video ( link above) . The static charts are provided for reference. The FATMAAN names are also reviewed in the video along with trade ideas and other charts of interest.

SPY 2 hour

IMO stay bearish below $$470.  Bear flag measured move is a projection, not a prediction. Technicians gravitate to beautiful symmetry such as this but price does what it wants and with the Jobs report before the bell as a catalyst, price could easily blow past and lines on the chart.

SPY 30 min

QQQ 2 hour

The bottom of the box at $380 is a massive level. While price holds above the marauders will be held at bay.  A break below however should bring in more selling and open the door to a $20 measured move to $360.

QQQ 30 min

IWM 2 hour

Nothing really matters on the downside except $210.  THat is support for a consolidation range that has extended for a year. A break below, from a technical perspective, would look a lot like a market top for small caps. Again, the bear flag projection is not a prediction. It’s there to give you a target if in fact the bear flag breaks and price takes out the prior low at $217

IWM 30 min

 

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