The last decade was all about the cloud and technology. The next decade might look like very similarly to the last. We discussed a few longer-term ideas at the beginning of the show and then dived into trends that are more relevant to now and the next year. One emerging development is the U.S. Dollar weakness which might put the foundation for new momentum leaders. Gold, gold miners, energy, emerging markets underperformed significantly in the past few years and this might be coming to an end.
It is still a bull market out there but:
77 stocks gained more than 50% in the past month. This is an extreme number that is not an exact market timing indicator but it is often a sign of frothiness in the market. Add to that the unusually low put/call ratio and rarely high greed levels and one can make the argument that the indexes might be due for a pullback in the short-term perspective. The gradual uptrend of the past couple of months has created such unreasonably high expectations that even a 3% pullback might feel like a panic selloff to many. With that in mind be aware that:
A bull market pullback might happen through sector rotation. For example, while biotech corrects a bit, another sector (like basic materials or retail) might step up and help the major stock indexes like the S & P 500 to remain relatively unscathed.
Any pullback will most likely be welcomed as a buying opportunity. This is not really a shorting opportunity for most people. Pullbacks to a rising 20-day EMA are a normal part of any strong trend.
Appetite comes with eating. The greed and risk-on behavior comes with higher prices. We saw another week of epic short squeezes. Tesla (TSLA) has come within 7 points from the proverbial $420 “going-private” level that Elon Musk joked about on Twitter last year. Shopify (SHOP) is back near its all-time highs after a 30% drawdown and a test of its 200-day moving average just a month ago. Analysts waited for Nvidia (NVDA) to go up 15% in two weeks to start upgrading it confirming the popular Wall Street saying that “you don’t need analysts in a bull market and you don’t want them in a bear market”. Even Netflix (NFLX) had a big rally and it gained 10% in a week. It is now above its 200-day moving average and back near potential resistance.
The one thing many forget about bull markets is that not all stocks go up at the same time and there are constant sector rotation. Individual stocks can easily have a 30% drawdown in a bull market while the indexes remain in a range and go up. Be careful what you chase and if you do it, have an exit strategy.
The Fed kept the overnight interest rate the same and confirmed its accommodative policy. There was nothing surprising in Fed’s statement and yet, the U.S. stock indexes rallied. Bull markets are looking for the slightest reason to rise; just like bear markets tend to sell off on any news. The reason is simple – any news can be interpreted as both good and bad. In rising markets, almost everything is accepted as being positive; in falling markets, almost everything is accepted as being negative. Gerald Loeb said it best: “the market is better at predicting the news than the news is at predicting the market”.
Semiconductors led the market higher before the trade negotiations with China ended. It was the market’s way of betting that there will be some form of a deal. At this point, the semiconductor ETF – SMH is a bit extended and most likely due for some form of consolidation – through time (going sideways) or price (pulling back to its rising 10 or 20-day EMA).
In the meantime, dip buyers continue to scoop up even the slightest pullbacks in the biotech sector. While it is true that stocks like ACAD have had a sizable decline in the past week, most biotech stocks are still in a strong uptrend. RETA, for example, is a new addition to the Momentum 50 list and it is looking ready to test its 52-week highs near 220.