Momentum Monday – One Frothy Bull Market

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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:

  1. 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.
  2. 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.

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