Weekly Review – May 30 – From Failed Moves Come Fast Moves

Last weekend, we talked about the inability of bears to push the market lower and how they missed their chance. Price and sentiment are deeply related and impact each other. In a short-term perspective, lower prices often lead to more negative sentiment, which leads to even lower prices and sometimes panic selling. The Fed hinted that it might further raise the overnight interest rate later this year. The S & P 500 broke below the widely watched 204 level ten days ago, only to rally from there ferociously and get back near all-time highs. From failed moves often come fast moves in the opposite direction.

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For a second quarter in a row, we see equities rally near the end of earnings season Coincidence or maybe people prefer to put money to work after major trend-changing events are out of the way? Stocks gained across the board last week. The rally was well represented including various market caps and sectors – Semiconductors, Financials, Energy. Consumer Discretionary, Healthcare, etc.

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We talked about the extreme bearishness last weekend. The percentage of bulls among AAII money managers was super low. The picture hasn’t changed much, even after the rally last week.

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So what do we have here?
1. The S & P 500 is near the top of its past 18-month price range.
2. Many managers are underinvested.
3. The 52-week high list has started to improve.

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The combination of the above-mentioned factors means that there’s a pretty good chance that we see a continued strength next week. We might easily see an upside breakout in the S & P 500 that would later fail and lead to choppiness during the summer. This is just one likely scenario based on the current combination of price action and sentiment.

The bulls are still in control. Quite a few stocks broke out last week, but I still see plenty of long setups on the SL50 list of hot momentum stocks and beyond.

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Bias Beats Everything

Every market stat could be a bullish or bearish argument, depending on what you want it to be. Bias beats everything.

Let me help you with some popular examples below:

Bearish

Market breadth is nowhere near all-time highs – this is a momentum divergence. Take profits.

Bullish

Market breadth is nowhere near all-time highs – it still has a lot of room to improve.

Bearish

Market breadth is at all-time high – it is overbought. It has to reverse any time now.

Bullish

Market breadth is at all-time highs – yes, time for a short squeeze. It could remain overbought longer than most people can remain bearish.

The inflation adjusted returns of the S & P 500 for the past 16 years is zero.

Bearish: What a waste of time. Buy gold.

Bullish: Wow, this is amazing. So a diversified portfolio of stocks can really protect the purchasing power of capital.

The S & P 500 is near all-time highs:

Bearish: Yeah, but most stocks are far from all-time highs and most peoples’ portfolios are nowhere even close.

Bullish: This is amazing. It will create so many great trading opportunities as underinvested fund managers are forced back in. There is only one worse thing that being in the market while it is correcting harshly – it is being out of the market while it is rallying. The first won’t get you fired, but the second one most likely will.

Add your argument in the comments section. Better yet, do something productive and add some actionable setups that you are looking at.

Weekly Review – May 23 – Choppy Market of Stocks

Tops are not formed by a lack of buying. Tops are formed by heavy selling. The number of new 52-week highs has been declining for the past month and a half. We are yet to see a significant spike in new 52-week lows.

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The stock market continues to provide mixed signals. SPY is making lower highs and yet sectors like energy, basic materials, and financials are consolidating constructively above their 50-day moving averages.

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The market has been correcting through sector rotation.The first sectors to break down in late April – large cap tech, semiconductors, biotech, are starting to show relative strength, especially the semis, which are considered a leading indicator.

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There are not enough technical reasons to be overly bullish. There are not enough reasons to be overly bearish. There are plenty of reasons to be nimble, trade less and use smaller position sizes. The stock market continues to frequently change directions and fool the majority of overly active market participants.

Interestingly, the number of bearish money managers continues to rise, while the number of bullish managers is declining. This has often been a contrarian indicator as today’s capital has become overly short-term. I think the bears had their chance last week to push the market lower and create a panic, and they missed it. From my biased perspective, the bulls have a psychological advantage next week. I see more long than short setups. It is a different question if those setups are going to work. We saw multiple failed breakdowns and breakouts in the past couple of weeks. I was shaken out of a few positions only to see them come back.

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A few SL50 stocks that are setting up for potential breakouts:

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Here’s a link to my latest free weekly email. Consider signing up for it here. It is short, sweet and actionable. It consists of one swing trade idea and one insightful market wisdom.

If you are not a subscriber to Market Wisdom already, we offer a 14-day free trial.