Trading Desk: The Market Mood Has Turned

A week ago, Wall Street was still in free fall, dropping a full 6% from Friday to Friday. Here we are, in what appears to be a whole new world. If you were on the sidelines, you’ve missed a 6% bounce . . . and there’s no sign the rebound is over.

As of today, the NASDAQ finally has short-term support to work with. Big Tech is back.

Amazon (AMZN) has support again for the first time in weeks. Apple (AAPL) has support. Mighty Microsoft (MSFT) is even testing middle-term resistance. And Alphabet (GOOG) just pushed above that resistance line today.

That’s 38% of the NASDAQ right there. Throw in Tesla (TSLA), which is in a similarly supportive technical state, and the index as a whole could easily rebound another 3% before hitting any real resistance.

After that, life gets interesting. We could see the market hit a hard wall at that point . . . or finally shake off its Fed fears and get back to work.

For me, the question revolves around whether continued pain on Main Street will keep Wall Street under wraps. As consumers, we’re miserable. But as investors, there’s no logical reason not to profit from Main Street’s crisis of confidence.

Summer Sector Watch

And that crisis might be less crucial than Main Street thinks. Start with the energy sector, which has plunged 23% in the last two weeks on fears that a U.S. slowdown will trigger a new oil slump.

Get real. About 11 million barrels a day are still offline as long as Russian crude remains unwelcome in formal commodity markets. Unless that key supply source comes back, it’s going to take a lot of demand destruction to knock oil down a lot from here.

So why are energy stocks in a stealth bear market when they’re nominally the best shield against inflation right now? Nothing but fear. It feels like a recession already to Main Street . . . and whenever I gas up the car, I feel it too.

But as investors, you have to respect the fundamentals. The energy sector as a whole currently trades at barely 10X trailing earnings. Even if earnings get cut in half, that’s compelling compared to the market as a whole.

In the long haul, energy stocks have boosted the bottom line about 16% a year. Even if this year only lives up to that trend, that’s better than the market as a whole too.

Remember what Big Oil says: they’re not going to drill too much and let the market get away from them ever again. Expenditures are extremely disciplined. The old boom-and-bust cycle is over.

I’m thinking every portfolio needs some ExxonMobil (XOM) and Chevron (CVX) at this stage. The two of them together are almost as big as the rest of the industry put together. They’re the center of gravity.

Tech is a more daunting proposition. The sector as a whole is as dominated by AAPL and MSFT as the energy sector falls under the joint shadow of XOM and CVX . . . but the growth profile is no longer quite so good.

And the stocks are still no bargain. Unless you think there’s something magical about AAPL and MSFT, I’d skip the sector or dig down the food chain to find something that’s actually growing fast enough to justify its price.

The Tech-Finance Dichotomy

How about the banks? I have to say, they’ve lagged the market in the past week, setting up outperformance ahead.

None of the big banks have voiced any real concern about consumer credit deteriorating. That’s going to take months if not longer. In the meantime, the stocks look almost obscenely cheap . . . but not as cheap as energy.

I’d stick with the oil stocks for now. The banks are down 22% from their peak, but until we see a real rebound, they just aren’t where the heat is.

For years, we assumed that tech and finance moved in opposite directions. On any given day, one would be “risk on” and the other was “risk off” . . . the defensive posture.

Now, I think they’re both defensive and both a little overpriced. Stick with energy until we see inflation is finally under control once and for all.

Everything else in the economy fills in the rest of the puzzle around these three sectors. And remember, GOOG and AMZN aren’t officially “tech” companies any more.

Factor GOOG and META out of the communications sector . . . and AMZN out of the consumer group . . . and one way or another, we’ve hit the “exciting” part of the K-shaped economy in just the handful of stocks I’ve mentioned.

Other companies are interesting at the right price. But they aren’t the engines driving Wall Street on its comeback path. I just hope the heat is high enough to counteract the cold.