The best buying opportunities in bull markets happen after a pullback but buying that pullback is easy only in hindsight, especially if it is the one like we had last week. It was a volatile week, during which the major U.S. stock indexes (SPY, QQQ, IWM) went below their 20-day moving averages only to bounce sharply and finish near new 52-week highs.
Not all sectors bounced equally. With a few minor exceptions, we saw relative weakness in software names. So many sold off after their latest earnings report. SHOP went against that trend and after a big drop on Monday, staged an impressive 60-point rally. It continues to look constructively. Maybe, only MSFT, SPLK, and DOCU are looking better but both are a bit extended from their bases. Most of the other software leaders are actually looking vulnerable to further downside, especially considering the tax loss harvesting that happens at the end of the year – TEAM, MDB, OKTA, etc.
Biotech is still the undisputed leader. Quite a few of the biotech stocks are extended and yet they keep going higher, mainly due to short squeezing and rumors of potential acquisitions.
Consumer discretionary stocks shined on Friday after another much better than expected jobs report. SBUX has returned to the Momentum 50 list. I like how it found support near its rising 200-day moving average and it close strong above its 50-day moving average on Friday. $87 is the next technical hurdle and if it is cleared, it is going to 90.
The long-expected breakout in small caps finally happened. IWM cleared 160 and finished near the highs of its weekly range. There are few more bullish signs than small caps breaking out above a multi-month resistance and starting to outperform.
Biotechs shined again and many accelerated their ascent. Don’t chase overextended biotechs. There are constant sector rotations in bull markets, so we are likely to see pullbacks in this sector as well. Sometimes the stocks that seem the most extended continue to vastly outperform due to a short squeeze or an acquisition rumor. This is why nimble intraday traders often focus on this type of stocks – super high short-term momentum coupled with big short interest.
Quite a few software stocks continues to rise. SHOP had a beautiful big-volume breakout and it is now setting up near 340 for more. TEAM is consolidating between 125 and 130 with 130-131 being an important pivotal area. OKTA and MDB are in a range contraction mode and seem ready to bust higher.
Semiconductors tried to bounce but didn’t finish the week on a high note. Their destiny seems to be related to China and the U.S. support of the protests in Hong Kong wasn’t great news for both. Chinese stocks were a mixed bag last week. While many of the large-cap Internet stocks did really well – BABA, NTES, the overall Chinese market lost ground.
The expected breakout in the small-cap index Russell 2000 hasn’t happened yet. Instead, IWM tested its rising 20-day exponential moving average. If this bull market has more legs, the breakout will eventually happen. It just needs more time.
The biotech sector shined and had one of its strongest weeks this year. Many of the stocks in the sector are extended so chasing them here is not a good idea from a risk-to-reward perspective.
The other leadings sector – semiconductors, is down multiple days in a row. Many of the semis have already given up their earnings gaps: AMAT, QCOM, TER, or are testing their 50-day moving average. NVDA is so far holding the front and showing relative strength by going sideways.
Maybe next week, we see a reversal – biotechs will pull back while semiconductors rally. This type of sector rotation happens all the time in a bull market. Select sectors pull back but the major indexes remain near their 52-week highs.