Special Risk Capital Management LLC

Five Little Words August 28, 2022

August 27,2022 –  All it took was five little words from Chairman Powell at the Jackson Hole meeting and the market dropped like a rock in less than 60 minutes on Friday morning.  Chairman Powell said “until the job is done” in reference to the question “How long will interest rates rise?”.  The markets were hoping for a hint of a pause in the rate hikes or at least a slowdown, but nope . . . not yet (apparently).   The chart below of the NASDAQ Composite Index for reference:

The orange zig-zag line is my previous thoughts on an expected retracement and the blue is my new ‘worse case’ prognostication.  Will the 12093 level hold on Monday or will it go further down the price support level to 11533, or (worse) lower?  I’m thinking Monday will be lower, then late in the day (or Tuesday) a retest of 12093, then lower. ( i.e. the blue line.)

Even though the large cap S&P 500 Index lost over 4% for the week I note that all in not lost.  Volume Flow is neutral and the total volume (lower chart) on the Friday sell off was well below the 20 day average of trading volume.  So panic has not set in, at least not yet any way.  Overall long term, I’m still Bullish, but this market needs to pause to reset.  Remember that the overall economic state and world conditions have not changed.  The market has got ahead of itself, and that’s OK, it needs a ‘breather’.

Energy is up with continued strength in defensive Utilities.  China has had a bounce due to the Chinese Bank lowering interest rates.  But lowering rates to stimulate a sluggish economy is not a very positive sign, so I’m skeptical about longer term Chinese strength. 

The Short Term Sector Strength table is shown below –

We’ll see how investors react early next week about this correction.  If volume comes in, it could get ugly.  Where is the strength (volume on up bars) and where is the weakness (volume on down bars)?  Have a good week and stay observant.     …………  Tom  ……………

Looking For A Modest Pullback August 20, 2022

August 19, 2022 –  I’ve been expecting to see a modest pullback from the recent market rally for a couple of weeks, the question was ‘When’ would it start.  Well we got our answer late this week with what I think is that correction from an ‘overbought’ condition.  The S&P 500 Index has touched the declining 200 day moving average and that could have ‘spooked’ investors as prices have gone up rather quickly from the late June low.  Time for a pause to refresh.

This ebb and flow, back and forth of prices is to be expected especially when everyone is on “the same side of the boat”.  So while this may cause some concern, it is really ‘normal’.  Now, where will this go?  I’m initially thinking around the 12093 level on the NASDAQ Composite Index; that would be a ‘natural’ place to stop.  At that point we’ll have to see what volume has come in on down bars (selling), so far rather light, and what volume is coming in on up bars (buying).  Also is there an appetite for risk?  The small cap index (Russell 2000 / IWM) will give us an idea if folks are bailing out or seeing this as a buying opportunity.

This past week we’ve seen core and defensive sectors rise to the top and more aggressive sectors (technologies, pharma & biotech) fall off; less risk.  The Short Term Sector table shows this below:

Let’s see how this pullback develops as next week unfolds.  Many traders are on vacation in the Hamptons so volume is typically light which means it’s easier to move price, but price and volume remain as significant clues as to direction.  I’m still thinking that the “low is in” for this trend swing in the market, but that does not preclude a correction somewhere in between now and the previous low.

Have a good week.      ………..  Tom  ………..

Price chart by MetaStock; table by http://www.HighGrowthStock.com. Used with permission.

Due For A Pull Back August 13, 2022

August 12, 2022 – This was a good week for the stock market . . . a steady march higher.  My momentum / statistical indicators show that it is likely to pull back shortly.  I feel that it will either be a short pull back then resumption higher (in green) or a pull back and the start of a consolidation pattern (in orange).  In either case it sure is looking like the bottom is in, well, at least for now (the next couple of months).

Our task now is to identify where to put investable funds, especially if that pull back happens soon.  That’s where “Top Down Analysis” comes in.  First determine the overall market Trend, then identify what Sectors are leading that Trend.  Next what stocks in those sectors are the strongest.  Scaling into positions is recommended; no need to jump into the deep end all at once.  The Short Term Sector Strength table below gives us the information for the second step.

Overall we’re seeing some insider buying of their shares, the % of stocks above their 50 moving average is Bullish and Small Cap stocks are strong.  With Technology strong and Financials gaining that appears to be “Risk On” mode.   It’s been a busy week for me and I’ve still got a lot to do, so this will be a short posting, but the three steps that I outlined are important and deserve some careful thought by investors. 

Have a good week.       ……….  Tom  ………..     Comments are always welcome.

Price chart by MetaStock; table by http://www.HighGrowthStock.com. Used with permission.

Anticipation August 7, 2022

August 5, 2022 – A good week for the market, but let’s take a step back to catch our breath.  And speaking about market breath (yes, a play on words) last week was very positive.  Whether you look at the number of stocks above their 50 day moving averages or up / down volume things were looking pretty darn good.  The advance was broad, across large to small cap stocks, and deep, just about everything participated.  But (and there’s always a ‘but’), the Fed is still going to raise interest rates and inflation for now is still present.  Is the market anticipating good things happening in the next 6 months, because it always looks ahead, or were we just ‘oversold’ and due for a snap back rally?

I’ve drawn in roughly two scenarios in green and red on the chart above.  The green is the optimistic route.  The low is in and interest rates will increase but not by much with inflation slowing.  The red route is a less optimistic view with things improving at a slower rate, with perhaps one more trip lower.  I’m thinking that the low for the year maybe ‘in’ but we can expect volatility so that a steady rise will not be ‘in the cards’.  What is the strategy right now?  I favor a “scale in” approach where we put money to work an increment at a time and place it in areas / sectors that are leading the way.  It’s still a time to be cautious and selective.

Looking at the Short Term Sector Strength table below –

Seeing Technology based sectors at the top of the list provides us with a number of opportunities to invest in market leading companies.  One step at a time, this likely will not be a straight line to a new top.  What could mess this up?  Well, next week we continue with earnings reports and new CPI (Consumer Price Index) data comes out Wednesday morning.  Any of these could spook the market and a pullback would be typical.   Let’s watch the volume on down bars for clues as to whether the selling is minor or indeed profit taking after a strong rally.

Have a good week.    ………..  Tom  ………….

Price chart by MetaStock; table by http://www.HighGrowthStock.com. Used with permission.