I hope you are well and enjoyed your weekend. The bear market continues. Firstly, I hope everyone is staying safe in this market and following strict risk management. This is not a market to take excessive risk in, even if we see short-term rallies. Nasdaq just finished its seventh week in the red now, down 30% from its peak.
The Big Picture
Valuations are starting to look attractive again. Nasdaq is now trading at 15 times forward earnings, which is in par with historical averages.
Remember, in the bear market, valuations do not matter. What matters is the bottom in economic indicators such as ISM and HMI. These indicators call bottoms in the equity market much better than valuations do.
Only 20% of the Nasdaq-100 is trading above their 200-day moving average, which is the worst it has been in 2 years. This bad of market internals usually coincides with a potential market bottom. Is Nasdaq finding its floor? That is yet to be seen, but I am not going to risk any capital until we see an uptrend in economic indicators again.
Option Trades for the Week
As expected, bonds did rally last week, a week that showcased a true risk off environment. There has been massive call buying on the oversold QQQ, which demonstrates that traders are expecting some kind of a short-term rally. If we get a confirmation on the technical side, some vertical spreads on QQQs could be very profitable.
I do not have any open positions as of today, but I am looking at potential key earnings as catalysts. This week, Zoom, Best Buy, NVDA, and Costco could all provide great setups for trading. I am also looking at Target and Walmart to potentially bottom.
Tweet of the Week
The tweet of the week goes to MrBlonde for succinctly explaining why Walmart and Target collapsed last week. And why is that? The real reason these companies each fell more than 10% was due to their massive building up of inventory.
As inventory builds up, a company then has to mark down their inventory or sell their product at a huge discount. Both of these actions will impact future earnings and therefore reduce the company’s profitability. I have always said one of the leading indicators in an economic slowdown is the building up of inventory. We are now seeing that firsthand in retail giants such as Walmart and Target.
One Last Thing:
I am doing a webinar tonight on sentiment trading. I hope you can attend it. If not, make sure to watch the recording of it later in the week. I talk about ISM, HMI, lumber to gold, and so many other amazing indicators to get a gauge of market’s sentiment.
To your success,