MarketSmith powers the charts in this video.
The rating agency Fitch downgraded the US credit a notch. The US government is not considered a risk-free borrower anymore. The move rattled financial markets and potentially started a correction. Will we see a similar story to 2011 when Standart & Poor’s stripped the US from its AAA rating? Back then, the stock market was in free fall weeks ahead of the rating drop. The difference this time is that the main US indexes were within 5% of their all-time highs before the news hit the wire. Back in 2011, capital flowed to the perceived safety of treasuries. This time around, Treasuries were hammered before and after the rating announcement. Why do I even mention the US credit here? Last year, Treasuries and Nasdaq 100 were highly positively correlated. They moved together, hand and hand. This year, we saw a big divergence. Most tech stocks have managed to rally significantly in the face of rising interest rates. Can this divergence continue longer has been a question I asked for a few weeks now and the answer so far has been – yes. There are two main reasons for that:
- The market doesn’t believe interest rates will continue to rise because inflation expectations have been declining.
- Tech earnings continue to beat estimates by a significant margin on many occasions. All the cost-cutting that big tech companies did late last and early this year went to their bottom line. The market anticipated that and has been bidding them 6-9 months in advance.
I believe we are still in a bull market but we are currently in a pullback, choppy, range-bound mode that can last through August and September. I wouldn’t be surprised to see QQQ and SPY testing their 50 or even their 100-day moving average in the next few weeks. For me, this means focusing on short-term setups, trading less, and using a smaller position size so I limit any drawdown and frustration and be better prepared for the next trending market which is probably just around the corner.
Try my subscription service which includes a private Twitter feed with option and stock ideas, emails with concise market commentary and actionable swing, intraday, and position trade ideas, the Momentum 40 list of market leaders, and much more. See some of the recent testimonials.
PERFORMANCE
Here’s a Google spreadsheet tracking all closed options and stock ideas shared on my private Twitter stream and emails for subscribers.
Check out my free weekly email to get an idea of the content I share with members.
I published a new trading book recently. Check it out on Amazon.
Disclaimer: Everything I share is for educational and informational purposes only and it should not be considered financial advice.
