Zealm Market Update (April 2023)
An overview of where things stand and a preview of what's to come.
As the first quarter of 2023 comes to an end this week, here's what we are seeing in the market and where we think we might be headed in the next quarter.
Of course, as always, this is just our humble analysis and not financial advice in any way. 🙂
Let's dive in.
Where are we now?
In the S&P500, we currently sit at 4,050. That’s 16% below the January 2022 high and 16% above the October 2022 low. Literally, right in the middle. As shown in the chart below, we’ve basically been in this up-and-down range between 4,200 and 3,600 since May.
The Volatility Index or $VIX, which is a measure of investor fear, is diving down and currently sits at $19.02, the same price it was back in early January 2022. It doubled soon after. We believe the $VIX will shoot up higher very soon.
The Banking Crisis: Fixed?
Silicon Valley Bank (SVB), which was the 16th largest U.S. bank, collapsed due to a lack of diversification and a bank run. The stock dropped 60% in consecutive days. SVB specialized in banking for venture capital-backed startups.
The collapse of SVB and other banks facing solvency issues could cause continued volatility in the stock market, as investors may become nervous about the stability of the financial sector.
Investors may also be more cautious about investing in startups and venture capital-backed companies, which would hurt growth stocks and tech.
The Fed
Many people continue to have their eyes on the Fed and the schedule in which they will hike, pause, and cut rates. The Silicon Valley Bank incident has created more uncertainty in the market, as it has accelerated the expectation of when rate cuts will happen.
We see a significant risk here as cutting rates too early will bring on additional inflation. Not good.
What are the technicals saying?
This is a chart of the US Dollar (top) and the S&P500 (bottom). The dollar topped when the S&P500 was at the bottom so you can see the negative correlation here. The technicals are suggesting that the dollar may break out soon, therefore causing downward pressure on the S&P500.
Why haven’t we crashed (yet)?
The stock market is influenced by a variety of factors beyond the state of the economy. The fundamentals are truly grim, but with increased volatility comes an increase in the size of the up-and-down nature of the market.
The main thing we are watching for the next down leg is to see the put-to-call ratio become less bearish. It has been overly bearish - and when it has, it’s causing these melt-up, bear market rallies we’re seeing as people are overly short and need to cover their short positions once prices start going up. You can track the put-to-call ratio here.
What we are buying (and selling):
Overall, we are seeing the upside reward limited at these levels. We are preparing for the next downward leg by building up positions in:
Current Price: $30.88
Current Price: $14.09
Current Price: $16.65
SELLS:
Tech and Growth names: Apple, Amazon, Nvidia, Coinbase, Netflix
*If you have less of a risk appetite, look at buying short ETFs with less leverage. If you have even less of a risk appetite, stay in cash :)