Keith Harwood, OptionHotline.com
With a new year, we have the potential for major changes in the stock market’s price action. Rebalancing portfolios and a full year to prove performance for money managers mean we could see major shifts in certain sectors and the market on the whole. To start, I like looking at the general inputs that have been impacting technology, as it had a very bad 2022.
The first main indicator that I’m looking at is bonds. Let’s take a look at TLT, which is an ETF that represents US Treasury Bonds:
Bonds started the year on a positive note. With a bearish tone to bonds at the end of 2022, the stock market continued to be dragged down. This bounce back in bonds could be a sign that interest rates and bond yields simply can’t go any higher for now. That could be a positive for the stock market as people may prefer to bet on a stock market recovery rather than take the “safe bet” with a bond-heavy portfolio that may end up with stable or lower yield. Time will tell on this, but it leads me to believe that tech may have a chance to bounce back at the beginning of 2023.
To see if the market agrees initially, let’s look at the chart of QQQ, the NASDAQ 100 ETF:
QQQ continues to show weakness and is testing prior lows. But much of this is actually being driven by mega-cap companies like Apple. QQQ is holding up because people are still buying many tech names. Apple represents almost 12% of QQQ, so as it falls, it makes it hard for QQQ to rally. If other mega-cap names like Microsoft (nearly 13% of QQQ) start to fall more aggressively, as well, then 25% of QQQ is bearish even with just those 2 names out of 100 falling. There are plenty of bullish names in QQQ, but the performance of Apple makes that hard to see when looking at the ETF. That’s why I created the Outlier Watch List, so I could help others identify many of the names that are bullish even when QQQ doesn’t look like it.
Just to see how big of an impact it’s having, let’s look at a chart of AAPL:
And to illustrate just one name on my watch list that is bucking the bearish tone of QQQ, let’s take a look at Kraft Heinz (KHC), which made a new high last week and is only 0.46% of QQQ’s weighting:
With a market that is testing lows, I like looking for those stocks that are going against the trend that seems to be driven by a few very large companies. And expressing that view with call options both defines my risk and helps me get leverage! As mentioned, there are many more interesting names in this market for playing the potential rebound that I discuss weekly in my Outlier Watch List!
So please go to http://optionhotline.com to review how I traditionally apply technical signals, volatility analysis, and probability analysis to my options trades. As always, if you have any questions, never hesitate to reach out.