Never fight the Fed, especially when the Fed is fighting inflation. True enough. But sometimes, within a Fed tightening cycle, an opportunity arises at least for a short while (a couple of days to a couple of weeks) that one can trade from the long side. It is riskier in that it entails going against the primary trend.

We watch for deeply oversold sentiment conditions in various indicators, not just on a one or two-day basis, but on a 10-day moving average basis. We like using the CNN Fear & Greed Index as it is a composite index. A quick way to get the 10-day moving average on the index is to pull up the site, and at the top of the dial on the right, one will see the options of ‘overview’ and ‘timeline.’ Click on the timeline, then run the cursor over the line chart. Dates and levels for the index will appear. This past Tuesday, the 10-day moving average was 13.2, demonstrating two weeks of ‘Extreme Fear.’ Even after a 2% rally in the S&P 500 on Tuesday, the daily number closed at 16, Extreme Fear.

With a quick look at the timeline chart, a trader will likely infer that the market is at extremes in sentiment and that it argues for higher prices.

Have we reached a bottom, at least a tradable bottom, in the short term? We will know when we see a classic “O’Neill Follow Through Day.” If one is unfamiliar with that indicator, search for that phrase to become more knowledgeable. But generally, it entails an advance on the fourth day of a rally attempt that is a significant rise of 2 to 3 percent or more in price on greater volume than the previous session. Follow through days are not infallible and do fail from time to time, but no bull markets have started without one appearing.

So, what looks interesting if we are at the start of a run higher? Technology, for one, the long downtrends in growth names and the commensurate negative sentiment, is of interest to us. At present, there are few setups, but the recent action in semiconductor-related stocks looks promising. We will be watching that sector intently and will watch for positive price action. Higher highs and higher lows and the ability of those shares to regain and stay above their respective 20-day moving averages.

We will also intently watch sectors that have outperformed during the recent market carnage, Healthcare Services and Consumer Staples. They appear to be over-owned and over-loved in institutional portfolios. In its earnings call three months ago, Walmart, synonymous with consumer staples, said it would do its best to lower prices for its shoppers. They did exactly that, much to the benefit of the company’s shoppers. Investors pounded the stock after its earnings release on Tuesday as it missed on earnings and margins and gave downbeat guidance. That drop was indicative of an over-owned institutional favorite, otherwise known as a crowded long.

Our master cycle for the S&P 500 called for a high on Friday the 13th plus or minus a trading day with a sell-off into the end of the month, Memorial Day weekend.  The next few days will be instructive. We are becoming less bearish due to the overly bearish sentiment conditions, the breakdown in key safety stocks like Walmart, and the nature of the positive price action in ‘risk on’ growth stocks such as semiconductor-related shares. But for now, we will stick to the master cycle and look for a tradeable low around Memorial Day weekend. Intermediate-term, the cycle finds a low for the year only by late June.

Trade well & stay safe. JHS

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