September blues, political battles, Merck’s Covid pill and the beginning of a new quarter

Happy Saturday and welcome to our Weekly Digest! It has been a wild week on Wall Street. The last week of the quarter was a total fiasco for the bulls who got trapped in several rotational plays until the bears had their final say. On Monday, amid the market selloff, the EV sector was incredibly strong and offered investors a false sense of security. Similarly, for the next few days while tech was on sale, the financial and energy sectors were acting better. By Friday afternoon, the bears managed to push the entire market down to extreme oversold levels. As we expected, with the new monthly inflows coming into the market, the indices managed to bounce and offered a somewhat potent reversal. News of a new Covid pill developed by Merck which halves hospitalizations and deaths was greeted by Wall Street as re-opening plays such as airlines, cruise lines, and hotel stocks had an impressive bid.

This downtrend action has been fueled by an increase in the Treasury yield, a gridlock in Washington with regards to the government funding and debt ceiling, as well as continued pressure from rampant inflation readings. While we expect the politics game to be ultimately solved, the question of inflation is definitely more delicate. If inflation continues to grow at an alarming pace we might be due for an increase in the interest rate before the end of next year. A rate hike will benefit cyclicals and value type stocks while it will be a headwind for the big tech companies.

Our portfolio suffered some losses this week as we tried to time a possible reversal. However, on Friday we managed to take advantage of the action and booked daily profits in $AAPL, $MSFT, $GOOGL, $NCLH and $UBER. Similarly we added to our crypto exposure on Friday as $BTC managed to break above 45K which again helped our overall portfolio.

So, can we trust Friday’s reversals? Can tech be starting a new active sequence? or will value and cyclicals lead the market?

In order to measure Friday’s rally we need to see the next resistance and support points for the main indices and their corresponding ETFs.

$SPY chart

After 4 consecutive down days, the overall market managed to reverse on Friday as it reclaimed 428.78 and had a push above 436. It this bounce represents the beginning of a new active sequence the bulls need to make sure that 427.23 has been the low for October. In addition, we need to reclaim 437 and 440. The longer we stay below these levels, the higher the probability the entire market can drift lower. We are cautiously bullish in the $SPY for next week.

$QQQ chart

The tech sector has been hit the hardest due to the increase in the Treasury yield. As the rate fell below 1.5% on Friday afternoon, the tech sector rallied amid at a slower pace than the overall market and managed to post a reversal. For next week we would like to see the $QQQ above 363 in order to reclaim some momentum. For this to occur, we need strong participation from its leading actors such as $AAPL, $MSFT, $AMZN, $GOOGL and $FB.

$IWM chart

The small caps are a great gauge for market sentiment. This sector has been in a huge sideways channel for more than 9 month. Every time it looks set to break above, the bears come back and vice versa when it looks doomed. On Friday, it managed to reverse as well and is looking very constructive above the moving averages. Will this time be different and will it have the force to break out? If money comes out of big tech amid fears of chip shortages, supply demand bottlenecks, taxation and higher rates, the small caps might be an interesting sector to hide in.

$BTCUSD chart

Bitcoin has been a great trade on Friday afternoon as we engaged it as its poked it head above 45K for a 10% profit by the end of the day. We continue to hold 50% of our initial position there is still space on the charts. Next resistance areas are 50K and 53K. For support, holding above 46K would be constructive. It might need a few sessions to digest this move and let the moving averages play catch up. Similarly, $ETH and $SOLUSD have impressive breakouts out of their channels.

We are neutral going into next week’s action. While the reversals on Friday should provide some followthrough, from a technical perspective there are still plenty of obstacles ahead and opportunities for the bears to return. A break above the key exponential moving averages in the $SPY and $QQQ would be our buy signal for swing trades. For now, we will look to be tactical, day trade more and stay out of the way in case the market turns lower again. Holding this week’s lows for the next few weeks is important, as a break below will take us into correction territory. For next week, measure Friday’s bounce to see if the bulls manage to build above half of Friday’s candles. A break below this means that the sideways/downtrend will continue. From a macro perspective, see how the Treasury yield reacts to a possible political resolution. Earning season is fast approaching for the big tech companies. An array of headwinds is facing them: supply constraints, a strong US dollar, high Treasury yields, difficult comparisons to 2020 and a political climate prone to higher taxation. While we continue to be bullish on tech stocks for the long term, this end of 2021 might be a bit trickier and the annual Santa Claus rally might be delayed. We have started a few swing positions in cyclical/value type stocks such as $NCLH, $F, $UBER which might benefit from the current situation.

Have a great weekend and continue to follow our updates straight on our website and social media!

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