Friday, January 21, 2022

Morning Note: The Reality of "Free Money" Buying "Money-Losing Companies"

Well, so much for the short-term technicals! Yesterday morning I dared to present a chart that showed what have been reliable setups on the 60-minute timeframe and suggested that the morning's impressive rally might make it to the end of the session.


The anticipated breakout of the falling wedge (jargon for you regular video watchers) occurred, but then the dreaded failed breakout followed:

A technician might still argue that the above remains a bullish setup (although those divergences in panels 2 and 3 are not nearly as compelling as yesterday's), but, clearly, there's distribution going on here. I.e., traders are treating the rallies as opportunities to exit ahead of what is likely to be a challenging year for US equities in particular (tech [growth stocks] initially).  But, hey, this is short-term (interesting, but not meaningful for our purposes) stuff, and the day's still young...

As for the meaningful, for our purposes, longer-term setups, here's a look at the one-year daily chart of the S&P 500:

Breaking out of the rising wedge (bearish pattern), then falling below the 50-day moving average (green line that is now sloping downward), is a very concerning technical look right here. As you can see the index is testing its 200-day moving average (blue line). A break below there, on volume, could bring in a whole new raft of sellers. On the other hand, a strong bounce off of that line could bring the dip-buyers back in force!

We might also get into the weeds of options dealers' exposures and how they hedge their risks and so on (which can exacerbate the moves in either direction), but we'll keep it simple here.

Suffice to say that, indeed, this could turn into yet another dip-buying frenzy before it's over. But as we've been preaching for too long now, we think that -- while there are absolutely attractive opportunities to exploit in today's global markets for the patient long-term investor -- the ice is too thin to not be hedging big downside risk right here.

Asia struggled overnight, with 12 of the 16 markets we track closing lower.

Europe's bloody-well bloody so far this morning, with all 19 bourses we follow in the red as I type.

US major averages are taking a hit this morning as well (tech especially): Dow down 105 points (0.30%), SP500 down 80%, SP500 Equal Weight down 0.53%Nasdaq 100 down 1.30%, Nasdaq Comp down 1.32%, Russell 2000 down 0.37%.

The VIX sits at 28.10 (up 9.81%).

Oil futures are down 1.85%, gold's down 0.08%, silver's down 0.43%, copper futures are down 0.97% and the ag complex is down 0.50%.

The 10-year treasury is up (yield down) and the dollar is down 0.15%.

Led by consumer staples stocks, utilities stocks and Verizon -- but dragged by everything else -- our core allocation is off 0.56% to start the session.

Bloomberg macro analyst Cameron Crise touched on reality in a note this morning:  

emphasis mine...

"Well, today will hardly be the first gap-- either up or down-- in Netflix over the past couple of years. Surprises are part and parcel of trading that name, and with an estimated P/E ratio in the 40s, there just isn’t a lot of margin for error.
As for Peloton, you have by now perhaps seen some of the amusing memes going around. The company has never turned an annual profit, and now revenue growth is slowing sharply. When the tsunami of free money starts to recede, sometimes those that have bought money-losing companies find that they have got what they paid for."

Have a great day!

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