Momentum Red: Bear Rally Commences (Avoid This Sector)

[Midday Momentum] Tuesday, May 17, 2022 [Momentum Red: Bear Rally Commences (Avoid This Sector)]( By Garrett {NAME} Improving Sectors: Energy, Shipping, Packaging Weakening Sectors: Biotech, Asset Management, Application Software Watch List: SBLK, DVN, COP, SU, XOM, CVX, TJX, WW, SBUX, ORIC Dear Reader, I'm heading to the airport in about 20 minutes - bound for Chicago, where we're hosting our very first Money Morning LIVE! Summit later this week. Will you be joining me and the team? There's still time - either in-person, or you can stream our sessions live. [Grab the details here](. It'll be nice to return to the Second City, as I lived in Chicago for 25% of my life. I'm sure the BBQ hasn't changed. Although now that I live in the tropics, I now fear anything under 60 degrees. The dive bars are still there - still surviving COVID-19. The ultra-trendy, ritzy places -- ones that shun the characters I prefer to acquaint with -- have shut their doors. The last time I visited my favorite hole-in-the-wall - Finley Dunne's -- my friend lost in darts to Justin Verlander, and I ate four brats. But this week is less about memories and more about the summit with my fellow traders and the state of today's market. Momentum 101 There are certainly plenty of topics to discuss this week. Although with my "Momentum 101" discussion and views on the state of the market, I could probably talk for hours by myself! By now, you'll know that the M.O. of this letter is to discuss a key metric in this market: Momentum. Where is money flowing to? Where is it leaving? When is it best to go to cash in your trading accounts? And where/when can you look for Blue Sky breakouts? While broader market momentum is negative, individual sectors are seeing strength. Which ones? Energy and shipping. Companies like Golden Ocean Group Ltd. (GOGL), Star Bulk Carriers Corp. (SBLK), Tidewater Inc. (TDW), and Occidental Petroleum Corp. (OXY) are roaring. In the [World's Biggest Trade]( yesterday, we sold a put credit spread on Devon Energy Corp. (DVN), and it just hit a new 52-week high. We're in the green on this trade right away. Strong price momentum leads to stronger price gains. On the flip side, weak price momentum to the downside leads to weaker prices. So you can use calls to speculate on strengthening stocks, or do what I recommend and use put credit spreads to generate income and get a preferred entry on stocks you want to own. This is a major difference between trading and investing. Another Bad Sign for Overvalued Stocks Despite all the selling, 56 stocks have hit a new 52-week high today. By contrast, 148 equities hover at 52-week lows. You won't be stunned to see that most of the stocks are in weakening sectors like biotech, retail, and asset management. And I stumbled upon a statistic this morning that should scare anyone speculating in the biotech sector. Endpoints News notes that small-cap and mid-cap biotech stocks are struggling in 2022. How bad is it? Jefferies notes that 128 small-and-mid-cap (SMID) biotech stocks are trading for LESS than the value of their cash on hand. To put that figure in perspective, the previous record for stocks trading for less than the amount of cash on their balance sheet was... 45 in 2007. Back then, though, the Federal Reserve wasn't building a massive balance sheet and pumping cash into the market. Now that the Fed sugar is going away as the central bank fights inflation, biotech stocks are in serious trouble. This cash number signals that companies will likely not get potential buyout interest from larger biotech companies. In addition, the amount of cash they're spending in trials (their burn rate) is accelerating. In this environment, most companies trading under their cash value would be smart to close the company, return cash to investors (at a profit to today's levels), and keep the intellectual property. But most companies aren't that forward-thinking. They'll continue to burn cash and ignore that the capital markets aren't available right now for them. About 40% of companies have less than 20 months of cash, and 60% have less than 2.5 years of cash. Moreover, large investors aren't likely to come to the rescue right now, as most institutions are shifting toward defensive names and lower-risk positions. SMID biotech must therefore rely on strong drug trial results (despite the lower probabilities of success in this space) in order to become potential takeover targets. The top 15 biotech companies have enough capital on hand to purchase all 644 SMID biotech companies, but why would they? They can wait for the sector to drop further and buy at even lower prices. If you're investing in biotech stocks, you need to be very cautious. Our preferred strategy is to follow the buying patterns of insiders at the companies, and then buying shares or options and setting tight trailing stops. We monitor insider buying at every level and focus on biotech because of the upside. But we preach discipline when trading them, too. When I'm back from the Midwest, we'll talk about the latest biotech buys. MOMENTUM INDICATOR RED ALERT Recap: Morgan Stanley (MS) has called this a bear market rally. I'm calling it a short-term, dead-cat bounce. We've seen an improvement in the broader market, but keep in mind that the technicals remain extremely bearish. As low-volume buying dominates, 82.7% of stocks remain under their 50-day moving average, and 81% of stocks are under their 200-day. The S&P 500 momentum is improving, and selling pressure has decelerated in early trading across all market tiers. Remember, Tuesdays are one of the better days for the market this year, while Thursdays are the worst day. If we see two big days of buying, beware of a selloff in two days. THREE THINGS I'M WATCHING - Man-made Crisis: Back in December, I predicted the world could face a serious food crisis. I didn't expect that the food crisis would complement a massive energy crisis in certain pockets of the world. Most people can't point out Sri Lanka on a map (the island nation sits off the eastern tip of India)... but the country is down to its last daily supply of petrol (gasoline). Take a guess why? If you said their government's policies, you get a gold star. Sri Lanka is trying to go green and also cut back on petrochemicals for growing food. As a result, the country's rice production collapsed and it's desperately trying to import food. As the economy implodes, citizens are dumping politicians' cars into the ocean. Keep in mind, people can't eat gold. As I've said before, any politicians behind these insane energy and food policies are either stupid or doing it on purpose. - "Pay with Yo Face:" Shares of Clear Secure Inc. (YOU) have bounced back this year, despite valuation concerns. The company's biometric technology will expand beyond airports to stadiums and other places around the nation. Want evidence that Americans are willing to sacrifice biometric data for convenience? Mastercard Inc. (MA) has just announced a new tool that will allow people to pay for products at retail locations with their handprint or their face. Again, Americans will complain about privacy, but all bets are off if you can get them the hell out of Walmart Inc. (WMT) or into a plane faster. - Credit Alert: We had another monthly rise in U.S. retail spending, largely backed by record levels of consumer credit expansion. While the figure came in lower than expected (a 0.9% increase against a 1.0% projection), the data showed a massive revision for March purchases (from a 0.5% monthly increase to a 1.4% increase). Revolving credit continues to surge and I'm worried about consumers' budgets as we move into the summer months. HOT LONG SHOT I've written about the California water crisis for eight years now, and it's only getting worse. I've stood by my recommendation on JG Boswell Company (BWEL). This is one of the biggest cotton companies in California. It grows cotton... in a desert. How? Well, it owns one of the state's largest aquifers and sits on top of hundreds of thousands of acre-feet of water. Shares are at $891 right now. If we only focused on the water rights that Boswell owns, shares would likely be about four times more than that. The long shot here is that California changes its two-tier system of water rights, which drives up costs for farmers. As a result, Boswell would benefit from the higher water prices. You'd be talking about stock then trading at 3x or 4x its current value. Want to understand how stupid water laws are in California? Consider this idiocy. The state allows farmers to obtain water for less money than its citizens. What do the farmers do? They plant water-intensive crops like alfalfa, almonds, and cotton in a desert. They then sell a lot of the alfalfa to China... which feeds it to their cows. Get that? The California government subsidizes its water supply, only to end up seeing tens of billions of gallons of that extremely scarce water supply pouring into extremely water-intensive crops... which ultimately feed Chinese cows. Remember, either political leaders in Sacramento are stupid, or it's on purpose. It can't be both. WHAT YOU MISSED I have to revisit our subject from yesterday. As I noted, venture capital is drying up in U.S. startup hubs. As a result, startups are cutting back and protecting money. Speculation in the market is likely to nose-dive - a potential sign that momentum will remain lower for longer. SoFi Technologies Inc. (SOFI), the embattled fintech lender, released a report this morning raising concerns about high valuation multiples and the drying-up of stimulus and pandemic funds. The experts are finally saying that venture capital has hit the end of its growth cycle without the Federal Reserve's support in this market. Good grief! There was a 26% drop in venture capital investments during the first quarter of 2022, compared to the fourth quarter of 2021. Given the number of risks and ongoing compression in startup multiples, there are zero reasons to believe it will bounce higher in the second quarter. As I said, that behavior will spill over to the public market. Small-cap stocks and mid-cap stocks likely aren't going to find a bounce back. If you're trying to navigate those tiers of stocks, you'll need extreme discipline. You'll need strategies that help you identify cheap companies with strong balance sheets, excellent cash flow, and buyout potential. Don't fly around this portion of the market blind. Therefore, the S&P 500 and Dow Industrials must fuel any bear rally or short pops... which is what we're seeing today. Stay liquid, Garrett {NAME} You are receiving this e-mail at {EMAIL}, as part of your subscription to Midday Momentum. To remove your email from this list: [unsubscribe here](. To cancel, or for any other questions or requests, please contact our Customer Service team: [Online]( Phone: 888-384-8339 (North America) 443-353-4519 (International) Mail: Midday Momentum | Attn: Member Services | 1125 N Charles Street | Baltimore, MD 21201 Fax: 410-622-3050 Our Customer Service team is available Monday ‑ Friday between 9:00 AM and 5:00 PM ET. © 2022 Money Map Press. All Rights Reserved. Nothing in this email should be considered personalized financial advice. 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