Fear Is In The Air

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OVERVIEW
Introducing Our Sentiment Index

Swingly Sentiment Index

The movement of stock prices or indices is influenced by a variety of factors such as news, data, fundamentals, as well as the emotions and sentiment of individual traders.

The Swingly market sentiment index is a comprehensive metric that combines technical indicators (like volatility and momentum), alternative data sources (such general sentiment online & market trends), and macroeconomic trends (like changes in gold, commodities, and bonds) into a single numerical value ranging from 0 to 100.

Essentially, it serves as a barometer of the average swing trader's mood on any given day. This piece explores the construction of our Fear and Greed Index, interprets its results, and discusses its potential implications for investment strategies.

How is it weighted?

Momentum (40%): This aspect evaluates the extent of price movement in stocks or market indices over specific timeframes. It identifies periods of high volatility during times of uncertainty and lower volatility during stable periods. The index compares volatility over 10-day, 20-day & 50-day periods, considering an increase in volatility with no price increase (in congruence with volume) as a negative indication for market sentiment and a price increase with high volume as a positive sentiment.

Market Volume (40%): This category examines the daily buying and selling volumes in equities markets. It recognises that some days witness calm trading activity, while others experience intense buying or selling. The index interprets high buying volume as a sign of greed and high selling volume as a sign of fear.

Social Media (10%): This factor utilizes social media platforms like Twitter and Reddit to monitor hashtags and discussions related to stocks and the broader market. By observing trader behavior and sentiments expressed in posts, it provides additional insights into market sentiment.

Trends (10%): Analyzing Google Trends data for specific queries helps inform the Fear and Greed Index. An increase in searches for terms associated with negative sentiments, such as "stock market crash," indicates fear, while an uptick in searches for positive terms indicates greed.

How to combine this in your strategy?

The market environment sets the tone for trading potential, influencing investor sentiment and market dynamics. Monitoring major indices and economic indicators provides valuable insights into prevailing market sentiment. However, it's not enough to simply observe; traders must interpret this information effectively.

Our sentiment index combines all the key macro and micro stimuli which together impact the behaviour of the markets and thus individual investors.

Remember, there are only two fundamental equal and opposing forces which together move the price of any security;

Buying and selling.

The Topdown Approach

  1. Sentiment Score

By utilizing our sentiment index, swing traders gain insight into the underlying tone of the market. This understanding is crucial for interpreting whether individual traders, both buyers and sellers, are driven by fear or greed. Regardless of how promising an individual trader's setup may appear, if they oppose the prevailing market sentiment, they are likely to face challenges and encounter difficulty achieving success.

  1. Identifying Momentum

While the broader market provides a macro perspective, drilling down into specific sectors, industries, or themes unveils hidden opportunities. Analyzing sector-specific Exchange-Traded Funds (ETFs) and staying abreast of sector-related news enables traders to identify areas with momentum. Technical analysis and a relative strength ranking system further refine this process, highlighting sectors poised for growth and potential investment opportunities.

  1. Capitalising on Strength

Within robust sectors lie individual opportunities waiting to be discovered. Evaluating leading stocks within these sectors unveils potential trades with favorable technical setups. One key metric to consider is Relative Strength, which measures a stock's performance relative to the broader market. Identifying stocks exhibiting strong Relative Strength over varying timeframes (e.g., 1-3-6 months) provides a roadmap for selecting high-potential trades.

Summary

  1. Assess the Market Environment: Begin by evaluating major indices and economic indicators to gauge market sentiment and identify prevailing trends. Use our sentiment index to speed this process up.

  2. Focus on Strong Sectors: Narrow your focus to sectors or themes showing strength and momentum. Utilize sector-specific ETFs and technical analysis to pinpoint areas of opportunity.

  3. Identify Individual Opportunities: Delve into leading stocks within resilient sectors, focusing on those exhibiting strong Relative Strength and favorable technical setups.

NASDAQ
Extremely Oversold

SMCI Daily Chart

In the previous week, we witnessed the darling of the preceding bull market, SMCI, undergo a staggering decline of over 20% within a single trading session.

Likewise, the tech giant NVDIA experienced a rapid erosion of market capitalisation, shedding over $200 billion in value in less than four hours.

NVDA Daily Chart

The market has been on a downward trajectory since triggering a sell signal in the latter half of March, experiencing one of the most rapid declines in recent memory. As we monitor developments closely, our attention is firmly fixed on the potential for a reversal and upward movement.

Should this upward shift be confirmed, we anticipate the formation of what is commonly referred to as an "A" bottom, characterized by a sharp retracement bounce. This bounce could endure for a period of 1 to 2 weeks, during which we will closely observe key support levels for their reaction to market movements.

QQQ Weekly Chart

However, it's essential to maintain a broader perspective, recognizing that the intermediate-term trend continues to point downward. Despite the possibility of short-term rebounds, the overarching trajectory remains bearish.

In the midst of this market volatility, our broader outlook on rates and the U.S. dollar remains unchanged. We continue to closely analyze these factors as part of our comprehensive approach to navigating the ever-evolving landscape of financial markets.

The recent turbulence in the Nasdaq has left traders reeling, marking one of the most challenging weeks in over a year. The surge in volume has been nothing short of staggering, with the QQQ plummeting beneath critical support levels, met with a conspicuous absence of buyer activity to stem the tide.

QQQ Daily Chart

Taking a closer look at the weekly chart reveals a harrowing scene, as the QQQ breached both its weekly 10 and 20 Exponential Moving Averages (EMAs) in a single candle—an occurrence so rare it demands careful consideration.

For our dedicated Swingly subscribers, we trust that our steadfast recommendation to adopt a "risk-off" stance over the past week has served you well. It's clear that the broader market sentiment is one of extreme fear and overselling, with the intensity of this sharp, exaggerated pullback indicative of a market nearing exhaustion.

Credit: MacroCharts

Historically, such pronounced dips into oversold territory have often preceded significant rebounds. Indeed, we anticipate that much of this selling pressure stems from the Federal Reserve's recent hawkish commentary, expressing reluctance to expedite interest rate cuts in response to unexpectedly high inflation data.

As we navigate these tumultuous waters, it's essential for traders to remain vigilant and adaptable, ready to capitalize on emerging opportunities as market dynamics continue to unfold.

MARKET BREADTH
A Bounce Is Imminent

Percentage of stocks above daily 20 & 50 EMA

The breadth indicator offers a graphical representation of the proportion of stocks trading above various moving averages. When the percentage of stocks surpassing a chosen moving average exceeds 50%, the histogram reflects this with a positive (blue) bar. Conversely, when the percentage dips below 50%, the histogram takes on a negative (red) hue.

Upon careful examination of the data, it becomes evident that a significant majority of stocks have experienced substantial declines within a remarkably brief timeframe. A glance at the histogram's trajectory reveals the swift and pronounced nature of this pullback, suggesting that the market may have swiftly corrected to what it deems appropriate levels.

Our interpretation of this breadth report leans toward the positive. We find encouragement in witnessing a substantial correction occurring swiftly, recognizing that periods of heightened volatility often precede further volatility. Thus, while the recent downturn may have been sharp and painful, it also sets the stage for a potentially vigorous rebound.

Looking ahead, our optimism is bolstered by the prospect of market-leading stocks with high relative strength forming stage 1 bases in the coming weeks. This marks the initial steps toward emerging from the correction, potentially ushering in a period of renewed upward momentum.

SECTOR ANALYSIS
The Business Cycle

Credit: StockCharts

This chart illustrates an idealised depiction of the business cycle and the interconnected relationships between different markets within a typical inflationary environment.

In this visual representation, the business cycle is depicted as a sine wave. The initial three stages represent an economic contraction, characterized by weakening, bottoming out, and subsequent strengthening. Stage 3 specifically portrays the economy during a contraction phase, indicating a gradual improvement following a trough.

As the sine wave crosses the midpoint, the economy transitions from contraction to the three phases of economic expansion: strengthening, peaking, and eventual weakening. Stage 6 illustrates the economy during an expansion phase, beginning to taper off after reaching a peak.

In Stage 1, the economy contracts, leading to a rise in bond prices as interest rates decline. This economic weakness prompts loose monetary policy and interest rate cuts, which are favorable for bonds.

Stage 2 signifies a bottom in both the economy and the stock market. Although economic conditions stabilize, growth has not yet resumed. However, stocks often rebound in anticipation of an upcoming expansion, signaling the end of the contraction period.

Moving into Stage 3, there's a significant improvement in economic conditions as the business cycle gears up for expansion. Stocks begin to rise, and commodities indicate a shift towards an expansion phase by showing signs of recovery.

Stage 4 represents a period of full expansion. Both stocks and commodities are on the rise, but bond prices decline as inflationary pressures increase. To counteract this, interest rates begin to rise.

Entering Stage 5, economic growth and the stock market peak. Despite the ongoing expansion, growth slows due to rising interest rates and commodity prices. Stocks typically peak before the end of the expansion, anticipating an upcoming contraction. Commodities, however, remain strong and peak after stocks.

Finally, Stage 6 signals a decline in the economy as it transitions from expansion to contraction. Stocks have already started to decline, and commodities follow suit as demand wanes amid the deteriorating economic conditions.

Credit: StockCharts

Interpretation

The chart offers a comprehensive visual representation of the economic cycle depicted in blue, the stock market cycle represented in orange, and the top-performing sectors prominently displayed at the top. It's notable that the market cycle often takes the lead, with its movements often preceding those of the economic cycle. Specifically, the market tends to turn upward before the economic cycle does and conversely, it begins its downturn before the economic cycle follows suit.

In terms of sector performance, the technology sector typically takes the lead during market upturns, exhibiting resilience and forward momentum well ahead of other sectors. Following closely behind, consumer discretionary stocks also demonstrate strength as the market gears up for a bullish phase. These two sectors often serve as the primary drivers during the initial stages of a market rally, capturing investors' attention with their promising growth potential.

However, as the market cycle progresses towards its peak, the spotlight shifts to sectors such as materials and energy. These sectors tend to benefit from increasing commodity prices and heightened demand stemming from a burgeoning economy. Yet, an important turning point occurs when market leadership transitions from energy to consumer staples. This shift signals potential economic strain, often as a result of escalating commodity costs and changing consumer behaviors.

Subsequent to market peaks, economic contractions ensue, prompting proactive measures from central banks such as interest rate cuts. This, in turn, leads to a steepening yield curve, which proves advantageous for utilities burdened with debt and banks that benefit from lower interest rates and improved lending conditions. Ultimately, this cycle of low interest rates and increased liquidity facilitates a market bottom, initiating a new phase of the economic and market cycles.

Credit: StockCharts

Where We Are

Presently, energy and defensive sectors are driving the market, while speculative and cyclical sectors are trailing. We may be nearing the correction's nadir, and initial indications from sector analysis suggest the emergence of a potential bottom. However, we advise caution and recommend traders refrain from attempting to time the market bottom.

Moving forward, our strategy will prioritize defensive positioning, awaiting confirmation through individual stock stage analysis and our market sentiment indicator to ascertain if a bottom has indeed been established and if the market is poised to transition into stage 2. Until such confirmation is received, we will maintain a cash position.

WATCHLIST
The Market Leaders

The stocks listed below are demonstrating resilience by maintaining positions above their moving averages while exhibiting remarkable relative strength compared to the broader market. We will be closely monitoring their performance as indicators of market health. As the broader market pullback approaches its conclusion, we anticipate these securities to emerge as frontrunners, leading the charge in the upcoming market movements.

GCT: GigaCloud Technology Inc

GCT Daily Chart

 WULF: TeraWulf Inc.

WULF Daily Chart

ADCT: ADC Therapeutics SA

ADCT Daily Chart

BMA: Banco Macro S.A

BMA Daily Chart

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This newsletter does not provide financial advice. It is intended solely for educational purposes and does not constitute investment advice or a recommendation to trade assets or make financial decisions. Please exercise caution and conduct your own research.

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