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Market Outlook for the week of 2/28 – 3/4

Did the Stock Market put in a bottom?

As the War rages in Ukraine, outrageously wild swings in the markets have become the norm. But we saw some really promising signs last week which could mean that markets could have bottomed out. A crazy gap down on 2/24 which got bought up almost instantly reflects that we have buyers sitting on the sidelines who will not let the markets go beyond the levels where we fell to, on Thursday. If we purely use technical analysis, you just cannot turn a blind eye to the two monster rallies on Thursday and Friday.  That kind of a market move shows real conviction.

The interest rate hikes are already priced in at this point and the only wildcard left was the Ukraine war which has now been priced in too. Of course, this doesn’t mean that we won’t see any volatility going forward. The real interest rate hike which is coming up in March and any other wildcard that Putin is hiding in his pants is bound to generate significant volatility.

 

Macro-economic events next week

Next week is full of potentially market moving events with the war situation capable of generating significant volatility any time of the week. Because of this I will keep trading volume low.

  • Tuesday 1st – Biden Speaks
  • Wednesday 2nd – Powell Testimony
  • Thursday 3rd – Powell Testimony
  • Friday 4th – Payroll Numbers

What to watch for in Earnings next week :

We missed most of the earnings season, because of the nasty correction we have been dealing with for 2 months now. But earnings are still rolling in and we see a continuation of this recovery, I will definitely take some trades next week. There are plenty of companies reporting next week so there should be enough opportunities.

Macro Analysis

II am still blown away by the move we saw last Thursday. VIX spiked up to 38 before settling back down to 27 on Friday. As long as VIX stays above 22, we are still in danger zone and market stability will not return. Although the Putin situation is not an unknown anymore but the whole situation unfolding in Ukraine is very troubling. Add Powell’s testimony next to this added with Employment numbers and the only word that comes to mind is uncertainty. I will keep trading volume low and take a max of 3-4 trades per week.  

SPY observations – (Ignoring QQQ/DIA this week as they are all moving in sync)

After the bottom literally fell out last Thursday, the markets made a stellar recovery. The price/action on Thursday and Friday deserves some respect and cannot be ignored.   

What to watch for in the coming week

  • VIX above 22 will keep volatility in the markets.
  • $440 is still critical support for SPY although it briefly breached support last week. 
  • If Putin doesn’t pull out another trick from his hat, this could be the bottom of this Correction.
  • We will need to take next week one day at a time.

IWM observations (very Bullish)  

  1. We had a nail biting finish on IWM last Friday, where our IWM 200-201 trade had to be held almost until the last moment for it to turn into a winner.
  2. IWM has been showing some promising signs for weeks now that it has bottomed out. Last week’s price action accompanied with all mean-reversion indicators is confirming a bull case.

Bitcoin (Still holding ground)

  1. Bitcoin was once considered a safe-haven and a hedge against the stock market. After massive institutional interest poured into Bitcoin, it has now subject to the same money that move the stock market. I now use Bitcoin simply as a measure of “risk-on” sentiment. Bitcoin has so far held on its support between $30-$35K and is beginning to show signs of recovery again. That is always good news. Mean reversion indicators like DMI and RSI are also confirming this.

Portfolio Allocation:

My trading frequency has been very low for almost two months now as I am sticking to my own rules of treading carefully after hitting 40% allocation. The theme remains the same – Keep taking small trades on every sign of a recovery. Since this correction has been drawn out for so long and November, December were not spectacular either, the approx 60% cash in my portfolio will need to be deployed slowly to cancel out the losers and rebuilt my portfolio back to where it was. 

Key Takeaway: The stock market may have put in a bottom. As long as Ukraine situation doesn’t worsen, we have a fighting chance of good recovery from here. 

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