Stock market pullback or something bigger?

Pretty wild week we had in stock market eh? Monday was quite alright, then Tuesday, bam, panic, sell off, VIX rising, big majority of stocks declining, SPY lost around 2 %, QQQ almost 3 %, doomsday.Thursday markets continued their plunge, Friday morning sell off was quickly reversed and we finished green.

SPY finished the week 4,4 % from highs, with intraweek low at 5,8 % from highs, QQQ closed almost 6 % from highs, with intraweek lows at 7,3 %.

Is the worst over or will sell-off continue? Let’s take a look at what my models have to say.

Longterm main model

For sure action in stock market this week did not feel good. SPY and QQQ closed below 10 sma weekly and this was the third distribution week in a row. Especially technology sector and growth stocks got hit pretty hard, while cyclicals with energy and financials gained.

Regardless of what is going on in stock market main model daily and weekly remains bullish. This means that there is still not enough evidence/signs that we will see larger correction. Can it happen? Of course it can, nothing is certain in stock markets. But is it likely? I think not, at least for now.

If you want to learn more about my models please check this link. (Just in Slovene for now)

Midterm main model

Also my midterm model remains bullish, no sell signal. Volume and adv/decl oscillators are both in uptrend and in bullish zone. I would like to see some improvement still, following green arrows.

Last buy signal issued by this model was issued on October 8th 2020, one year ago. SPX and QQQ gained 27% as of Friday this week since then. We should not be surprised if we see sell signal in next weeks, but it did not happen yet.

If you would like to learn more about Midterm model follow this link. (Just in Slovene for now)

Outperforming/underperforming sectors

Outperforming sectors

So which sectors are outperforming SPX. For sure Energy should be pointed out, XLE gained almost 6 % and closed at the top of weekly candle. Second sector that outperformd are financials XLF (finishing flat for the week) and especially banks KBE (gained 4,4 % this week).

Other strong sectors are Russia RSX gaining 1 % and India INDA which lost 1,5 % this week.

Underperforming sectors

Among sectors that underperformed this week, I would like to point out Technology XLK & QQQ, Semiconductors SMH, Software IGV, Growth stocks ARKK, IBD 50 ETF FFTY, Work from home stocks WFH and Healthcare XLV. Except XLV all of these sectors are tech.

It seems money is rotating from these sectors to cyclicals. Does this mean that we should just sell everything and move to Energy and Financials? Not yet, build your positions slowly and patiently, try not not get whipsawed. I modify my positions on weekly level, to avoid mid week noise and eventual whipsaws.

Risk ON or OFF environment?

Charts are a bit mixed but in general still leaning towards RISK ON. SPX is still outperforming majority of defensive assets like XLU, XLP, TLT, GLD. Junk bonds JNK and High Yield bonds HYG are outperforming US treasuries IEF. Not as RISK ON as it was in the beginning of the year but still OK.

Additional bullish sign is that traders are piling into Crypto again.

Conclusion

Both Longterm and Midterm Socha Investing models remain bullish markets.

We are seeing rotation out of tech into energy and financials.

No signs of bigger correction. I will be keeping an eye if we head in that direction, my models will for sure warn me.

Good luck.