MarketSmith powers the charts in this video.
The market tends to surprise the majority. There was a lot of overconfidence and complacency at the end of last year, so the market staged a rug pull and corrected the exuberance in the first week of the new year. The reasons behind the pullback are always clear after it happens. It could be profit-taking among people who wanted to lock in some gains without paying taxes for 2023. It could be worrying about rates remaining higher for a longer period because the economy and the job market remain strong. It could be the rise in tensions in the Middle East – marine shipping and coal stocks perked up last week as a potential sign of increasing energy insecurity.
None of these reasons should be taken too seriously. If the market wanted to rally, it would’ve rallied on even much scarier news. What matters is that currently there’s more selling and dip buyers are not able to absorb it, so prices are coming down. If we assume that this is still an uptrend, then this pullback is creating a great risk-reward buying opportunity – better than the one at the beginning of the year. So many stocks and ETFs are now down multiple days in a row. Where do we buy this dip without getting burned? At the very least, wait for a move above the previous red candle. Then put a stop below the bounce candle low and trail it.
So far, we are seeing a bit of a defensive rotation. Large-cap biotechs are the top four best-performing stocks on the Nasdaq 100 year-to-date – MRNA, REGN, AMGN, GILD. The financial sector ETF made new 52-week highs as the S&P 500 pulled back last week. This isn’t new – financials tend to run in expectations of strong earnings. Most start reporting in a few days. I wouldn’t be surprised to see a buy the rumor, sell the news action here.
The vast majority of stocks are in a pullback mode so trading on the long side has been challenging. The good news is that earnings season starts in a week or so which will spice up the tape.
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