Liquidity, FOMO, weak U.S. Dollar and Treasuries, career risk for money managers continue to drive stock prices higher. The large-cap indexes, SPY and QQQ have gone parabolic. In the meantime, the small-cap Russell 2000 has consolidated in a tight range and it looks primed for a breakout.
This bull market continues to correct the excesses through sector rotation – when one sector pulls back, another step up and leads higher. Many of the stocks that sky-rocketed during the COVID crises started to pull back while the ones that were hurt the most are perking up – restaurants, casinos, cruise ships, retailers, etc. The likely reasons behind that rotation – The FDA approved a 15-minute COVID test that costs $5 and several vaccines are in their trial stage and it is very likely they get approved.
The S&P 500 hit new all-time highs and it is now up 5% for the year. The Nasdaq 100 accelerated lifted by the big five tech stocks that now account for 50% of it – AAPL, AMZN, GOOGL, MSFT, FB.
Stock splits seem to be moving prices again. A Deja Vu from the late 90s. In theory, a stock split should have zero impact on a price. In practice, it has done crazy miracles. Apple announced a 4 to 1 stock split, then the company hit a $2 Trillion valuation and kept going. Tesla went up almost 50% after announcing a 5 to 1 split.
In the meantime, the small-cap ETF Russell 2000 tested its 20-day moving average and market breadth hasn’t looked this bad in a while. Will it matter this time? In a strong bull market, such divergences can be resolved through sector rotation. The small-caps can bounce next week and everything will be forgotten. We saw it numerous times in the past few months. Just when a sector was looking ready to roll over, it woke up and jumped higher. Software and biotech are the most recent examples.
The most followed indexes – QQQ, SPY, and IWM are above their 10, 20, and 50-day moving averages; In other words, in a clear uptrend. Six stocks account for more than 50% of the Nasdaq 100 and 23% of the S&P 500 – AAPL, FB, AMZN, GOOGL, MSFT, TSLA. All of them are looking constructively.
In the meantime, many momentum leaders have been under pressure. Biotech is among the worst-performing sectors for the past month. XBI is looking vulnerable to further downside pressure. If XBI loses 107.50, it might test 110. Most software stocks didn’t have a great earnings season. We saw quite a few selloffs and the usual bounces have not been very convincing: AYX, CRWD, BILL, TWLO, etc. There are more bearish setups but most of those setups have been failing and reversing higher.