AI Summary of the Previous Week:
- Geopolitical Tensions: The S&P 500 took a noticeable hit this week influenced by escalating conflicts in the Middle East. This situation heightened concerns about oil supply and led to increased market volatility.
- Sector Performance: The energy sector performed relatively well amidst rising oil prices, benefitting from the geopolitical situation. In contrast, technology stocks experienced volatility, with semiconductor companies under pressure due to trade and supply chain concerns.
- Economic Indicators: Inflation fears resurfaced, particularly with rising energy prices. Speculation about potential interest rate hikes put additional pressure on the market, causing uncertainty among investors.
This week illustrated the S&P 500’s vulnerability to external forces, particularly geopolitical events, emphasizing the need for investors to stay alert to global developments.
The market is sitting just below the range it has been trading in for the last few months. This is setting up three potential scenarios of which, I have no idea what will happen.
Here are the scenarios:
- IF the market continues lower on Monday, all bets are off and we are likely going lower with a possible retest of the 6550 level. It means the buy the dip folks don’t have enough cash to overcome the sellers and the bears run wild.
- IF the market bounces up to the 6800 level and then reverses, same scenario, we are going lower with a possible retest near 6550.
- IF it can get to 6800 and hold, moving back up to 7000 is a more likely outcome. Then we rinse and repeat for the next attempt for the market to decide a direction.
Given the spike in the Capitalized NL, I would pick option three if I had to pick. It has been a reliable sign of a market low. HOWEVER, the Iran invasion may drag on, which could give us the pull back I would love to see. The market rarely does anything in a straight line and an increase in volatility is really the only thing that seems to be on deck.
Two potential trades are setting up nicely if the market continues to pullback and the Iran invasion drags on. The first is shorting oil as it comes down to earth. I have no idea when this conflict will end. It could be six hours, six days, six months, etc. In that time, oil will likely continue to rise. How far up it will go before it comes crashing down, I have no idea. What I do know with certainty is oil will come down once the conflict subsides and I will ride the price of oil down that hill all day. Next is the VIX. I start looking to short it when it goes above 40. Right now it is sitting at 30. It is a high percentage win and high return trade that only happens every year or two. Another trade I love to take when the opportunity presents itself.
One thing to pay attention to is the 52 week high/lows. It has been trending downward for weeks and that is a good sign the market is ready to pull itself back at some point. It is not a timing indicator, but something to look at. We will see if that happens.
For the time being, I am still mostly on the sidelines and only up marginally for the year. Better to sit on the sidelines than make poor trades and give money away to other traders.
