Momentum Monday – Strong Week for Stocks

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Neither Covid nor rising inflation or Fed’s plan of tapering is scaring investors off. The large-cap indexes – SPY and QQQ, hit new all-time highs. The small-cap Russell 2000 had one of its strongest weeks in 2021 and closed above its 50-day moving average. The stock market is hitting on all cylinders in the midst of what is supposed to be a seasonally weak period for stocks. I guess we should not be really surprised by all that strength and relentless dip-buying. Money supply has gone up 40% in the past two years alone which is the fastest pace of increase in U.S. financial history. There’s so much money in the system and so many new millionaires (56MM by the last count) that pictures of rocks are selling for millions of dollars as NFT digital art. The world has invented entirely new asset classes to speculate on.

Covid cases, hospitalizations, deaths, and restrictions are rising but it seems financial markets are looking past this threat and betting on a recovery six months or so from now. At least, this is how I read the recent price action in airlines, hotels, and department store stocks. Most of them took a sizable haircut during the summer and are now starting to stabilize and even look constructively. I am staying away from them for now but keeping a close eye on the development in the space. 

The negative correlation between tech and the so-called recovery stocks (mostly old-economy sectors like retail, financials, homebuilders, industrials) appears to be breaking. Both groups are now rising in unison. The software ETF- IGF closed at all-time highs. So did the semiconductor ETF – SMH. Financials and homebuilders are not too far behind.

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Momentum Monday – Another Dip Was Bought

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The S&P500 and the Nasdaq 100 had a  minor 2-3% pullback but finished the week on a high note. Inflation-sensitive stocks fell because of the latest Fed minutes revealing discussions about tapering later in the year. The reopening stocks were under pressure because of the rising Covid cases around the world. In the end, the market was saved by another sector rotation – this time in tech, especially large-cap tech stocks. 

One would say that this is the same tape as in the middle of last year when anything tech outperformed in the face of lockdowns and restrictions, especially considering the recent rally in grocery stores and discount stores like BJ, COST, KR, ACI. The difference this time is that department store stocks were also strong – M, JWN, KSS.

In the meantime, many cryptocurrencies jumped higher – boosting crypto-related stocks like MARA, RIOT, SI, MSTR, COIN. At some point last week, I thought that the speculative frenzy in crypto will siphon capital from software stocks but this didn’t happen. Most of them held well and are looking higher – IGV, MDB, ZS, etc.

Overall, the decline last week has built some good risk/reward setups in strong stocks that held above their 20-day moving average. We picked up some last Thursday and Friday and I share below others to consider. 

I am leaning bullish for the first half of next week but I also don’t think it’s a time to be overly aggressive. Currently,  the bearish scenario involves the major indexes (IWM, SPY, QQQ) losing their lows from last Friday. The small-cap ETF – IWM, is still looking the most vulnerable –  making lower highs below its  50-day moving average.  If it loses  211, it can drop quickly to 205.

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Momentum Monday – Inflation and Covid are Still in Play

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The price action is still dominated by frequent and fast sector rotations from inflation to tech and high-yield names and back. 

Housing names had a strong week – we bought NAIL at 88, sold some near 92, holding the rest for a potential move to 100.

Industrial metals showed notable relative strength with breakouts in steel, copper, aluminum names. We capitalized on that with X and FCX calls. Some of them are still looking attractive going into next week but if declining interest rates can be a headwind.  

Falling interest rates are positive for richly valued high-growth stocks – typically software and semis. We saw a strong earnings reaction in many software stocks this quarter. U and PLTR broke out. SNOW followed. PLTR is looking promising for the next week if it can clear its highs from Friday. The same can be said about TEAM and ZI.

Small caps are still weak and that won’t change until IWM goes above its 50-day moving average. Oil, clean energy, and reopening stocks like airlines and hotels. It seems the market is still worried about Covid.

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Disclaimer: Everything I share is for educational and informational purposes only and it should not be considered financial advice.