What's up, Traders Edge?
I'm out here in Arizona getting ready for Cubs spring training tomorrow, but first we need to talk about Monday's rally and what it means for the rest of the week.
The market gave us some interesting signals that suggest we might be starting a relief rally.
(To watch Monday's video replay, tap this link.)
Monday's Rally Sets the Stage
We got a pretty nice rally on Monday. S&P 500 (SPX) was up 67 points, good for 1%. Invesco QQQ Trust (QQQ) up 1.12%. Dow Jones (DJI) up 0.83%, and the Russell 2000 (RUT) was up a little bit less than 1%.
Does this mean the selling is over? It does not.
However, during sell-offs, there are almost always some violent relief rallies. We've been basically straight down since the end of January in the S&P, but you get these big rallies in between. Tuesday maybe sets up for the beginning of a little bit of relief rally.
Where does a relief rally come from? The answer is no new news.
Yes, what's coming out of Iran and some of the issues we've got here in the United States with private credit and growth in the economy are still there. However, we don't have any new shoes that have dropped. Nothing over the weekend, nothing so far on Monday.
The market may say, "Okay, there's no more huge news bombs to drop on us, so let's see if we can find a tradable bottom." We're right above the 200-day moving average down at 6,608. Maybe we can find a tradable bottom and make a move back above to 6,800.
I think the market looks like it wants to maybe rally at the beginning of the week. It's an interesting week, with quadruple witching on Friday and CBOE Volatility Index (VIX) expiration on Wednesday. There are pockets of liquidity and pockets of illiquidity that are created, and we can flow through those pretty quick.
If no news hits, no news bombs, nothing crazy, and oil doesn't make a major spike, you could see a little bit of a relief rally.
Oil and Bonds Hold the Keys
Yes, oil is still quite high. United States Oil Fund (USO) is around 115. It's off the highs from last week, but really, if we're gonna get an extended rally, we need to see USO back toward 100 and maybe lower.
That's really what's gonna give us an extended rally and allow the market to take off. But in between, while we're in this war, while oil's remaining high, until we can get that straight open, when oil stops going up and just hangs out for a couple days, guess what? The market wants to go up. It says to itself, "Maybe this is over."
Similar action in the bond market. Remember, the bonds are really the issue here. Oil is what's causing bonds to move, but bonds are the market's problems. Higher rates are bad for stocks.
iShares 7-10 Year Treasury Bond ETF (IEF), the 10-year, is back toward its 200-day moving average, back off those lows. We could see it maybe catch a little bit of a bid, maybe back to the 96.50, 96.40 range. iShares 20+ Year Treasury Bond ETF (TLT) has similar price action and has more to rally. Longer duration bonds do have higher volatility. It's back above 87. I'd like to see it maybe move back to 88 bucks if we're gonna get a relief rally.
The relief rally that we may be beginning is gonna be bonds maybe getting a little bit of a bid and oil no longer rallying.
VIX is telling the same story. As bad as last week was with new lows, it didn't hit new highs in VIX. There was some ugly selling in the volatility index on Monday. Remember, we can adjust it. VIX should be up, so it was a rough one.
Looking at that VIX futures term structure, we're still in backwardation, but it's a little different. You've got March above the cash. You've got the cash above the front months, but you've got the curve as a whole really flattening up. This is confusion. Confusion typically means the market's trying to figure things out. It doesn't have a hold on things.
When the market doesn't have a hold on things, you can get a relief rally.
VIX will probably pull back a little bit more, bonds probably up, oil probably stable. Markets maybe make a run at 6,800, QQQ back above 600. Maybe they make a run at 605.
If rates do rally, you're gonna see some strength out of the Russell 2000.
One Stock to Watch: BP
With that in mind, what is my one stock to watch? I want you to look at BP (BP), British Petroleum. It still has more catch-up work to do relative to the major US conglomerates. It's been very strong. You can see it's just been going off, and it's been irrespective of energy.
BP looks like it wants to go to 45, maybe higher.
Now, when they get that straight open, oil is gonna roll over quickly, but near term, this thing looks like it has a head of steam and could be heading significantly higher.
One of the questions I get a lot is, "Mark, you keep saying look for opportunities to buy stocks that you wanna own. Look for opportunities to buy stocks that you wanna own." Well, a lot of people then ask, "How do I do that?"
We're answering that on Thursday. This Thursday, Hannah and Andrew are gonna be talking about how to time your entries on stocks that you wanna own, stocks that have been beaten down. You can click the link in this email to join.
Keep an eye on those bonds. Keep an eye on oil. But really, watch TLT and IEF. They're gonna tell you exactly what's gonna happen.
Your only option,
Mark Sebastian