Ivanhoff Capital

MarketSmith powers the charts in this video.

The S&P 500 and the Nasdaq Composite rallied to their 50 and 20-day moving average where they were rejected. This could be the beginning of a new leg lower or at the very least more choppiness in the coming days. The gap and fade in Nvidia are not helping the Bulls’ case either. They just had one of the best earnings reports in their history and couldn’t hold their gains. Many stocks tend to top when they sell on good news. I am not looking for a top in Nvidia. The stock is still above its 20 and 50-day moving average and it is still in a clear uptrend but I am not looking to enter it right now either. 

A major source of active traders’ edge comes from using tight stops. Tight stops allow for small losses and winners that are much bigger than the losers. It is challenging to swing trade stocks with tight stop losses during volatile, choppy tapes. It is almost guaranteed that you will get shaken out. Small losses can accumulate fast even if you use a relatively small position size. Drawdowns lead to frustration and a loss of confidence. This is why it is so important to be aware of the market environment and what works in it. Keeping a large cash position, trading less, and using a smaller position size is not a bad approach for many here. If you have to trade, intraday makes the most sense currently because it is easier to find tight-stop entries and good risk-to-reward setups. If you prefer swing trading, consider using options to buy premium. The beauty of options is that you know exactly how much you have at risk – usually the entire premium. This provides you with staying power – you are less likely to get shaken out. It doesn’t matter if the market gaps against you. The most you can lose is the size of your premium. This is why you manage risk in options via proper position sizing. If you assume your risk is x, you will either lose x if wrong or make multiples of that if right. 

The tape remains volatile with a clear distribution under the surface. Most of the momentum stocks that had held relatively well in the past few weeks are getting hit one by one. If you are hiding in names showing relative strength, it hasn’t been working that great in this choppy tape which tells me that this correction might have more downside room. The stocks that are outperforming on green market days tend to be the ones from the bottom of the pit or highly-shorted names. We should see leaders starting to outperform if the correction is coming to an end. Many of the leaders are usually on my Momentum 40 list.

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MarketSmith powers the charts in this video.

We saw more distribution days last week. Most stocks went down via gradual, slow-motion selling. We haven’t really witnessed any panic selling that tends to mark short-term bottoms. Market breadth reached oversold levels last Friday. Most stocks gapped down on Friday after being down several days in a row. As expected, that gap faded. The fact that the indexes are in a correction is now evident to everyone. More people are turning bearish which means that we might see a quick bounce to shake out all the bearishness. 

If this is just a garden-variety correction within a bull market (which I believe it is), it makes sense to compare it to what happened in February/March of this year. That pullback started just when the market became a bit euphoric after a big run in January. The correction had two legs lower intercepted by a big bounce towards SPY’s 20dma. On the first leg lower, almost all stocks got hit. Then most had a big 3-day bounce to their 20-day moving average. During the second leg lower, some stocks (especially in tech) went sideways, showing relative strength. The moment the correction was over and the indexes bounced, those tech stocks outperformed significantly. I am not saying that this is the way the current correction will play out and what the duration of which leg will be, but it is a decent map to keep in mind. A notable difference this time is that all major indexes are below their 50-day moving average. QQQ never closed below its 50dma back in March. 

Nvidia (NVDA) reports earnings on Wednesday afternoon. It has been the biggest leader so far in 2023. My guess is that this bull market won’t be over until NVDA is hit hard which is not very likely to happen at this point in time. The last time Nvidia reported, on May 24th, they crushed estimates, raised guidance and kick-started a big rally in the tech sector. The stock is up 200% year-to-date so a lot of the good news might be already discounted in its price. Every momentum investor owns it, so any significant dip is likely to get initially bought. If it gaps up, I would not be surprised to see it fade as people rush to take partial short-term profits.

Try my subscription service which includes a private Twitter feed with option and stock ideas, emails with concise market commentary, real-time market education, the Momentum 40 list of market leaders, and much more. See what subscribers say about my educational service.

Check out my free weekly email to get an idea of the content I share with members.

I published a new trading book recently (2023). Check it out on Amazon.

Disclaimer: Everything I share is for educational and informational purposes only and it should not be considered financial advice. Read my full disclaimer here.

MarketSmith powers the charts in this video.

If inflation expectations are diminishing then why are interest rates still rising? The 10-year yield is close to multi-year highs. I don’t know if rates are the reason for the recent weakness in tech stocks. It would make sense but they didn’t have a big impact for most of 2023 as big tech stocks had a substantial recovery. What matters is that the number of distribution days in the Nasdaq 100 has quickly increased in the past couple of weeks. QQQ sliced below its 50-day moving average without having the typical at least one-day bounce near that level. We saw a similar price action in many of the 2023 leaders like NVDA, MSFT, NFLX, SMH. Everyone who waited for those stocks to pull back so they can buy the dip suddenly doesn’t want to buy them anymore; either that or selling is overwhelming any buying attempts.

The Nasdaq 100 is down less than 6% from its 52-week highs; the S&P 500 is down 3%. In the meantime, many high-momentum, high-beta stocks are down between 10 and 50%. Imagine what would happen if the indexes continue their pullback in August and September and drop 10-15%. The current earnings season has been a wake-up call for many of those high fliers. They went up significantly ahead of their earnings and came crashing down after them.

The one area of the market that has continued to thrive is the so-called cash cow stocks of companies that produce high free cash flow. The ETF COWZ is near all-time highs. It helps that the energy sector accounts for 35% of the ETF. eight of its top ten holdings are energy stocks – CVX, MRO, VLO, EOG, PSX, PXD, LNG, FANG. Not the sexiest and fast-moving stocks but energy (XLE) is the one sector that is still above its 10 and 20-day moving averages. Healthcare (XLV) is there too.

Choppiness and indecision are normal during earnings season. Add to it the seasonally weak August, September, and October in a pre-election year and one should not be overly surprised by the weakness in many tech names. The overall bull market is still intact but it is currently in a correction, choppy mode. Declining markets require a different approach than rising markets if you want to keep your profits from earlier this year. Some of the helpful moves are reducing position size, trading less in general if you swing trade, and being extra nimble on your intraday undertakings. The good news is that the best swing and position trade entries always come after a correction. The deeper the correction, the better the opportunities afterward. Corrections should make you smile, not worry. 

Try my subscription service which includes a private Twitter feed with option and stock ideas, emails with concise market commentary, real-time market education, the Momentum 40 list of market leaders, and much more. See what people say about my service.

Check out my free weekly email to get an idea of the content I share with members.

I published a new trading book recently (2023). I think it provides great educational and very practical value. Check it out on Amazon.

Disclaimer: Everything I share is for educational and informational purposes only and it should not be considered financial advice. Read my full disclaimer here.