MarketSmith powers the charts in this video.
After a slight pullback early in the week, most stocks bounced and closed strong. This time it wasn’t just about tech names. Other sectors also woke up and started to participate in the rally. Market breadth is improving. The S&P 500 is back to the same level where the Fed started raising rates 5% ago. This is truly impressive. Some say it’s about A.I. but we know it is not as simple as that. There are other factors at play. The debt ceiling is likely to be raised again. The economy is still strong. There are plenty of job openings. Commodity prices have been declining for months which has helped with reducing inflation expectations. No one is talking about the Fed and inflation anymore. All the rage is about A.I. and how it could impact productivity and innovation in many businesses. I don’t know if it’s just a fad. If it isn’t, we are still in the early stages and there are plenty of big movers left in the market.
The month of May passed and the buyers haven’t gone away. They are actually expanding. Quite a few companies which had significant downside gaps after earnings have fully recovered. Others are having big upside gaps and are holding them for the most part. This is bullish market behavior. How did we go from “the market is being carried by only a few stocks” and “market breadth is terrible under the surface” to “it’s a bull market”? As the cliche goes – the change happened first slowly, and then suddenly. It started with a few mega-caps. Then, other tech stocks joined. And most recently, other sectors are trying to bounce as well. You don’t fight the tape in such a situation. You find a way to participate. This is what I did when I bought SPXL last Thursday alongside my smaller option trades. Keep in mind that small caps just closed above their 200dma. If this rally has more room, we are yet to see big moves. As usual, not everything will be moving at the same time and at the same pace. There will be plenty of shakeouts, upside gaps followed by intraday selloffs and then recoveries, downside gaps followed by recoveries, and violent pullback to 10 and 20-day EMAs. How do I know this? This is how typically bull markets behave. Trading seems easy only in hindsight. At some point, enough people will turn bullish and we will see signs of complacency in the market. Some might even argue that those signs are already here. This is when the proverbial rug will be pulled.
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