The major indexes (QQQ, SPY, IWM) are still stuck in a range below their 50 and 20-day moving averages. For me, this means being less aggressive with swing trades and being more nimble in general. And yet, under the surface, many market leaders are acting constructively – breaking out or setting up for a potential breakout. This is an important development because market leaders tend to lead the averages. Two big trading themes are standing out:
The market seems to be pricing in a second COVID wave. Anything related to social distancing has been outperforming notably – software (DDOG, CRWD, TEAM, NOW, SPLK, OKTA, ZS, FSLY, AVLR, UPWK, MDB, TTD, WDAY, HUBS, PLAN, PCTY), work and leisure at home (PTON, TDOC, LVGO, DOCU), diagnostics (NVTA, NTRA, DGX, QDEL,etc.), social media (TWTR, PINS, SNAP). If the same theme persists, we are likely to see online retailers wake up as well (AMZN, BABA, SHOP, JD, ETSY, JMIA, etc.).
Clean energy – this is not just politically-related. It’s a major world trend that might persists for a long time. Solar (VSLR, RUN, SPWR, FSLR, NOVA, DQ, CSIQ, JKS, ENPH, SEDG, etc), electric cars, fuel cells, charging stations.
SPY and QQQ closed below their 50-day moving averages for the first time in a while. Historically, the week after September quad witching is the weakest for stocks. From a statistical and technical point of view, next week might bring further downside pressure for stocks in general. Curiously, this weekend I see more and better risk-to-reward long setups than last weekend. Biotech, clean energy, social distancing stocks, many small caps, in general, are acting in a constructive manner – breaking out or setting up. There are great opportunities on both the long and the short side.
SPY and QQQ tested their 50-day moving average. The initial bounce was faded near their declining 20-day EMA. Then, both came back to their 50dma again on Friday. In the meantime, many of the momentum favorites took quick a beating last week – OSTK, W, DOCU, CVNA, etc. Most major earnings reports were heavily sold or faded – PTON, LULU, CHWY, ORCL. Small caps broke below their 50-day moving average led by weakness in financials and energy. The tape has changed.
The only thing that is still holding the indexes from breaking down is the constant sector rotation. Homebuilders showed notable relative strength on Friday as the 30-year fixed mortgage rate reached new all-time lows of 2.86%. There were also quite a few consumer cyclical stocks that broke out or are setting up for a potential breakout – CROX, NKE, UA. Can rotation save the day again? It’s quite possible but for the first time in a while, there are short setups that are looking more appealing than long setups. Some momentum leaders seem to be forming topping formations and setting up for potential breakdowns.