Date: January 21, 2022

Market Craving Some Better Behavior

Last Friday’s little reversal is a distant memory. Tuesday saw selling right out of the gate. On Wednesday and Thursday, the bulls went to work in the morning, exactly what I did not want to see. When markets are pulling back or correcting, you would rather see weak openings that flush out sellers and entice the bulls to do some buying. The last two days broke the hearts of the bulls as early strength was heavy sold with stocks cratering during the final hours of the day. And there has been massive computer program selling lately. The reasons are irrelevant, but major money has been selling, similar to Q4 2018.

As I mentioned a few times, there has been damage done to the bull market and that will need to be repaired. However, the biggest bright spot is high yield bond spreads. They are not widening versus treasury bonds. Heck, they are not even as wide as they were last November. I bring that up because it would be atypical to see a major stock market decline without the high yield market showing significant damage first. Not impossible, but not very likely either.

At this point in the throes of the pullback, the major stock market indices are not behaving well. Large cap value and the Dow Industrials act the best in a relative world. On the sector side, healthcare, staples, utilities, energy, industrials and materials are the strongest, not exactly what we want to see in a healthy market, but not the death knell either.

Netflix had a giant miss in new subscribers and that stock should crash at least 20% at the open, taking the NASDAQ 100 down with it. Friday bottoms are suspect, so I unless we see a hard selloff at the open, I think we’re looking at next week before the bulls put up another attempt at a low.

Since the last post, we bought SSO and sold DVA, FREL, TLT, ROK, DVA, GDX, some UNH, MPC, XLE.


Paul Schatz, President, Heritage Capital