Momentum Monday – When Will This Bull Run End?

MarketSurge powers the charts in this video.

The S&P 500 and the Nasdaq 100 closed at a new all-time high again. The mid-cap ETF, MDY is setting up for a potential breakout out of a long multi-week base. Small-cap stocks are also starting to wake up. And yet, there seems to be a solid dose of negative sentiment. I love skepticism during bull markets because every trend needs disbelievers.

People are citing bearish momentum divergences as the major reason. The number of S&P 500 stocks above their 200 and 50dma is decreasing while the index is making new highs. This is how indexes topped in the past. The trouble is that timing a top is a lot tougher than capturing a bottom because stocks top as individuals and bottom as a group. A bearish divergence can continue a lot longer than most expect and can resolve in two ways: We can see an expansion of the rally as more stocks participate. This happened last year in May and June. Or we can see a correction and most stocks pull back.

From where I stand, both scenarios are equally plausible right now. More stocks joining the rally mean more and better opportunities in faster-moving stocks. A correction means lower prices in the strongest companies – so many investors are dreaming about buying pullbacks in the strongest semiconductor and software stocks. Any dips will offer better risk-to-reward opportunities. 

What would make me bearish is an increase in distribution days.  Stocks falling on big volume for multiple days is a sign of distribution or institutional selling. We haven’t seen that yet. Stocks making lower highs and lower lows in the time frame of your interest – be it weekly, daily, or hourly is what would make me take on some short or buy put options. It’s as simple as that. Before those occurrences, bearish divergences don’t matter. They can continue a lot longer than most expect. As legendary investor, Peter Lynch said: “Far more money has been lost while preparing for a correction than during the corrections themselves”.

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Momentum Monday – Strong Tech Earnings Lift the Market

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Another new all-time high for the S&P 500 and the Nasdaq 100 despite of the Fed’s comments on interest rates. Powell said that they will very likely wait until May before they cut rates to make sure that high inflation won’t come back. The market initially sold off but quickly bounced and made new highs after strong earnings from Meta and Amazon. The economy is strong, the job market is strong, inflation is slowing down, companies’ earnings are beating estimates, there are 6 trillion dollars in money market funds, and it’s an election year, which means there will be more deficit spending. There are plenty of catalysts to fuel stocks higher. Nobody knows how high.

Granted, nothing goes straight up. Pullbacks and corrections are a normal part of every bull market. Seasonality is bearish between now and May and yet some parts of the market haven’t shown any traces of pausing. There are some bearish momentum divergences. Consumer staples are outperforming in the past few months which is typically defensive. Small and mid-caps stocks have significantly underperformed year-to-date. They are a much smaller part of the market than they used to be. The current market cap of all Russell 2000 companies is $2.5 Trillion. Just Microsoft alone has a market cap of 3.1 Trillion. Apple is at 2.9T. Google and Amazon are at 1.8T each. Nvidia is 1.6T. Meta is 1.2T. Each of these is big enough to be an index/ETF on its own.

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Momentum Monday – Strong Earnings Season So Far

MarketSmith powers the charts in this video.

Last week brought strong earnings from so many different industries – ASML (semiconductor machines), IBM (Cloud, AI), NOW (software), NFLX (entertainment), ALV (auto parts), AXP and COF (credit cards), VZ (telecom), LVS (casinos), PG (household products), VLO (refining), etc.

We also saw stronger-than-expected GDP growth. Granted mostly due to higher deficit spending and debt level but inflation is also coming down as expected. The economy might be just as strong as the stock market right now. If this is the conclusion the market makes this earnings season, we might see a rotation into small caps.

Small caps were in a game of whack-a-mole last week. IWM gapped up four days in a row and it faded immediately afterwards. A break above 198.50-199 would start a new leg higher. A break below 193 would start a new leg lower. 

The bulk of earnings season is still ahead of us. Most of the big tech reports in the next three weeks. Some of the big ones next week are MSFT, AMZN, GOOGL, META, AMD, etc. Many of them have already made a significant move in the past few weeks to a few months. A positive earnings surprise might be already baked in. This means a gap-up might be used as a reason to take some profits in some of the more popular names.

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