Author: Ivanhoff

MarketSmith powers the charts in this video.

September is seasonally weak but the real reason behind market weakness lately is the market waking up to the reality. The selling accelerated after the FOMC meeting this week. The Fed didn’t say anything new. The market finally realized that the Fed is not bluffing about keeping rates above 5% in 2024 to fight inflation. This is what caused the selling in stocks and the breakout in rates. The Fed has no reason to cut rates before inflation gets to a 2% handle for multiple months, unemployment spikes, or the indexes have a substantial correction. 

The S&P 500’s YTD VWAP and 200-day moving average are both around 420. This is also the level from which SPY started its big summer rally back in late May. It’s a big level and I wouldn’t be surprised if it gets tested soon.

After last week’s selling, sentiment is overly bearish. People are even talking about meltdowns and the 1987 scenario. Such a view is contrarian most of the time, but one has to be open to all scenarios. The market tends to surprise the consensus opinion. If you are short, you better be nimble and take profits often and quickly. The same concept applies if you want to get long in this tape. It is still not an environment where one should be overly exposed or aggressive in any direction. Being tactical, using small position sizing, and keeping drawdowns small will lay down the foundations for much faster account growth during trending tapes.

Keep in mind that nothing goes straight down. Even if the current correction accelerates, there will be violent bounces along the way. This is why I say don’t short in the hole – chase extended names. Obvious breakdowns are likely to shake you out before any further downside. Wait for a bounce near a declining moving average. This doesn’t improve our odds of success but at least we can enter with a tighter stop and get better risk to reward which can give us an edge.

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The tape has been choppy lately. Green days are followed by red days and vice versa. Most breakouts are fizzling quickly. If you are not nimble enough to sell on strength, you are stuck holding the bag. I don’t know if Friday’s selling was due to monthly option expiration but many stocks are looking vulnerable on multiple time frames. The odds are that most people are now bearish and the market tends to surprise the majority. Wednesday’s FOMC can bring extra volatility and lead to a change in direction. 

There is a Federal Reserve meeting next week. No one in their right mind expects the Fed to cut the rates given the recent uptick in inflation and jump in energy prices. The consensus is for no change. The second most popular opinion is for a 25bps rise. I also think no change is the most likely scenario. None of that really matters. What’s important is how the market will react. Lately, the market has been searching for direction as there has been more selling than buying under the surface. 

There’s a new sector rotation almost every week. The one constant recently has been the strength in the energy sector – not only oil & gas stocks but also uranium and coal. I wouldn’t chase them here. Most energy stocks are extended and currently don’t offer tight-risk entries. Financials also woke up last week. The vast majority of financials beat earnings estimates this quarter and went higher after their reports. Then August came and all pulled back. Now, they are starting to perk up again. I’ll be watching for setups.

The current tape is volatile, setups are sloppy. We have to take things one step at a time and adjust to whatever the market sends. There are still decent ideas popping up but one has to be quick to take gains. In a tape like this, it makes sense to trade less and with a smaller position size. This is not the time to be aggressive, either long or short.

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Check out my free weekly email to get an idea of the content I share with members. How my ideas/alerts did.

I published a new trading book recently (2023). Check it out on Amazon.

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

MarketSmith powers the charts in this video.

Market breadth has been deteriorating. 10-15 large-cap stocks account for the majority of the indexes’ gains year-to-date. Typically weak market breadth precedes market weakness but not always. The last time rally participation was small back in March/April, we saw an expansion into more sectors. This time we have weak seasonality so things might play out differently.

The Nasdaq 100 and S&P 500 held above their 20-day moving averages. If they lose them, we will probably see an acceleration in selling. A lot will depend on market rates. The 10-year rates are hovering around 4.3%. A breakout there will weigh down on tech stocks. We are already seeing some of them breaking down. If NVDA loses 450, it can pull back to 435. 

AAPL was under significant pressure last week on news that China doesn’t allow Federal government employees to use iPhones at their workplace. The China/U.S. relations seem to be souring. The rally in Chinese ADRs lasted a blink of an eye. It failed quickly just like it did many times this year. U.S. officials keep saying that doing business in China is not possible for Western businesses anymore. Deriving a significant income from China is turning into a liability again. Just look at the price action in SBUX, NKE, AAPL, WYNN, LVS, and many semiconductors. 

One has to remain nimble and tactical in this choppy environment. There are decent opportunities on both the long and short side but if you don’t stay in them for too long. Stocks like ABNB, UBER, GOOGL, and AMZN are building new bases. Cyber security stocks like CRWD, ZS, OKTA, PANW, ANET are setting up for potential breakouts. September is seasonally weak so most breakouts are not likely to last for too long. It is a scalping market environment. If the indexes lose last week’s lows, I will go heavier on the short side for a quick trade.

Try my subscription service which includes a private Twitter feed with option and stock ideas, emails with concise market commentary, real-time market education, the Momentum 40 list of market leaders, and much more. See what subscribers say about my educational service.

Check out my free weekly email to get an idea of the content I share with members. How my ideas/alerts did.

I published a new trading book recently (2023). Check it out on Amazon.

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