Here in New York, the weather is starting to get warmer. People are out and about on this Memorial Day weekend as the temperatures start to rise. But what about the market? Are things heating up or are we headed for much lower prices? Let's take a look at the current market conditions.
Sentiment got extremely bearish this Spring. AAII Bulls reached some immensely low readings, which is a good sign from a contrarian point of view. In addition, the 20-day EMA for the Put/Call ratio has reached some elevated levels. These are both good signs. The VIX, however, has not spiked to the extreme levels that I would like to see. We still have not had the type of panic we did in early 2020 or in prior bear markets.
The Nasdaq Composite staged a William O'Neil style "Follow-Through Day" this week. Accumulation on the indexes are always a good sign, especially if we don't see distribution come into the market in the subsequent sessions. The S&P 500 is also rallying off its' recent lows. IWM and IWO also saw some nice moves this week with IWO seeing some nice accumulation come in.
I've been starting to see some stock setups this week, mostly in oil names, but also in defensive names like NOC and LMT, as well as in shipping names like ZIM. LNTH also broke out this week and so far is acting well. I have not, however, seen an extremely broad round of stock participation like we saw in 2020 as the market soared higher. So where does this all leave us?
I personally have taken some "probing" buys as Jesse Livermore would call them. I own LNTH, ZIM, and am watching NOC and LMT for potential buy points. However, at this point, I am only 25% invested, and I am in no rush to get aggressive. This was a mistake I made when I first started trading. The market would be oversold and I'd plow in thinking I had caught the bottom. This type of mindset leads to "booms and busts" that can potentially destroy a trader both financially and psychologically. Instead, it is better to take things slowly and to only add positions as things start to heat up. It is also important to note that the summer months are notorious for trading. It is very possible that we may chop around until the 2022 mid-term elections as the market digests inflation, interest rates, and the war in Ukraine. If we have indeed bottomed, I do not believe we will see a v-shaped rally like we did in 2020 because that rally was based on enormous FED stimulus. I'd actually like to see some difficult trading in the summer. This would spike the VIX and ultimately lead to a major market bottom. Either way, my main concern is to listen to the market rather than trying to impose my forecasts or anticipations onto it. I am content to take things slowly and one step at a time until the market tells me it's time to step on the gas.
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