Author: Ivanhoff

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For the better part of 2021, we got used to seeing constant sector rotations. When small caps were rising, large-cap tech was pulling back. Things changed last week. All major indexes rallied together and cleared pivotal levels. 

Semiconductor stocks are the new leaders. It started with semiconductor equipment stocks like AMAT, LRCX, UCTT, ASML, ICHR, KLAC breaking out first while the main indexes were chopping in a range. Then, chipmakers and designers joined the rally last week – MU, TSM, ON, NVDA, AMD, INTC, QCOM, QRVO, SWKS, etc. If the same trend persists, we are likely to see the lower-priced, smaller-cap semiconductor stocks start to outperform.

It might come as a surprise but oil stocks are among the best-performing stocks for the past 6 months which de facto makes them momentum stocks. Quite a few of them broke out last week after a month or so of consolidation.

Most homebuilders are setting up for a potential breakout which should not be a big surprise with the homebuilders ETF at all-time highs. Some names to watch next week: BZH, TPH, MTH, TOL, etc. They are not fast movers but are looking constructively. 

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The S&P 500 tested its rising 50-day moving average, bounced and finished the week at new all-time closing highs. What’s different this time is that the typical stocks that have been pushing the market for many years (tech) are 20-50% below their highs from February. The leaders have been mostly cyclical stocks which is something you see at the beginning of a new bull market, not the end. At least, this was the case in 2003. Nowadays, the government and the Fed have an even bigger role. What matters is that capital iis not leaving the market; it’s merely rotating between sectors. Growth is not that scarce anymore and interest rates are rising, so there have been new leaders in the market for the past 3-4 months – home builders, semiconductor equipment, financials. retailers, oil and gas, transportation, restaurants, industrial metals, etc. I don’t know if this is just a blip or it’ll last longer. Such sector-wide trends usually persist for many months. 

It’s not just rising interest rates and a major increase in supply that is pressuring  tech stocks. The drop started because of those reasons but accelerated by the liquidations of some highly-leveraged momentum hedge funds. The talk is that Bill Hwang’s Archegos Capital had to liquidate his entire $15 Billion position on over $80 Billion gross notional exposure (he was levered 5x). He had big positions in Chinese tech giants BIDU, TME, VIPS; broadcasting stocks VIAC and DISCA. If the later is true, we might soon see a bounce in many of the oversold tech stocks.

The constant talk of chip shortage is clearly impacting the price action in semis. There were so many major breakouts on Friday – AMAT, UCTT, LRCX, KLAC, KLIC, etc.

The lack of housing supply and the expectations of a big infrastructure bill is bidding homebuilders and industrial metals. So much strength in steel, aluminum, copper on Friday. The homebuilders ETF closed at new all-time highs.

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The charts in this video are powered by MarketSmith

The Fed is saying that it doesn’t worry about inflation this year. The market has a different opinion. Long-term rates have been rising, pressuring most tech stocks, SPACs, and recent IPOs which went public at elevated valuations. In the meantime, the NFT and crypto space is flourishing. People are spending crazy money on digital art, farts, virtual houses, tweets, collectibles, you name it. A sign of froth and a side effect of too much money in the system some would say. Or maybe it is just the early innings of a new Internet. Only time will tell. The whole mania has been spilled over public markets. Any stocks related to NFT have gone up 2-5x in the past couple of weeks: TKAT, OCG, ZKIN, JFIN, YVR, HOFV, IMTE, etc. Even FB and ETSY seem to be rising based on it. Quite a few blockchain and crypto-related stocks are still setting up – MSTR, SOS, MARA, RIOT, etc.

Watch the 310 level in the QQQ next week. If it is lost, we will see a considerable number of former momentum leaders breaking down from their bearish flags.  

If QQQ somehow manages to retake its 50-day moving average and then clears 325, we are back to a FOMO market. I am already seeing some clean energy stocks tightening up which can be a good foundation for a rally.

Basically, the market is in a consolidation mode. It has been choppy and indecisive lately which has required traders to be nimble.

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.

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