Momentum Monday – The Dip Was Bought Again

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Last week was a mirror image of the previous – the highly-shorted meme stocks crashed and the rest of the market went to the moon. There were so many  20-30% bounces in momentum stocks that pulled back to and below their 50-day moving averages in the previous 2 weeks. 

Sentiment was so gloomy entering last week that it seems for a moment we had forgotten that dips are buying opportunities in bull markets. Pullbacks to 20 and 50dmas are normal and even desired because they provide good risk/reward entry points and keep the FOMO (fear of missing out) in check. Such shakeouts are needed because they create anxiety and doubt. No trend can continue without skeptics because otherwise there would be no one left to buy.

There are currently so many underlying trends:

  • The biotech ETF made new all-time highs. Gene-editing stocks have been raging higher;
  • The so-called recovery stocks continue to outperform – financials, oil & gas, leisure, small caps in general;
  • Inflation plays are waking up. Despite rising interest rates, the homebuilders ETFs broke out on Friday and are approaching their all-time highs;
  • Many cannabis stocks have already more than doubled since the November elections. The dips to rising 20-day EMAs in the sector remain buying opportunities; 
  • Obviously, the clean energy stocks are still in play. They are currently in a consolidation period. Don’t lose sight of them. After a few weeks of pullback or sideways action, many of those names can set up again.

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