Author: Ivanhoff

MarketSmith powers the charts in this video

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Inflation is slowing down but not as fast as estimates which gives the Fed a good reason to continue to raise interest rates. Some Fed officials even opined that a 50bps increase might be needed at the next meeting. The market has done a marvelous job so far this year brushing aside any bad news and pushing higher. Every 4-5% pullback has been bought so far. This is not likely to change unless interest rates and the US Dollar really spike higher. 

Rug-pulls and shakeouts are normal during rising markets. In fact, you need a pullback for a better risk-to-reward entry. One could feel the FOMO and hubris last week when junk started to make crazy moves on Wednesday. I tweeted the following at the time:

It didn’t take long after that for the indexes to pull back and take most speculative names with them lower. 

QQQ and IWM managed to close above their 20-day EMA. They have been riding their 20dEMA since mid-January. If QQQ closes below it, it will likely test its year-to-date volume-weighted-average price of around 290. The YTD VWAP for SPY is around 400.

While tech is consolidating recent gains, we might see a rotation into other sectors. Biotech woke up on Friday and it hasn’t really done much since last summer. After all, bull markets correct through sector rotation. If we are in one, we should see more of those. 

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MarketSmith powers the charts in this video

I just published a new trading book. Check it out on Amazon.

Many tech stocks have been on fire since the start of the year as inflation expectations have been steadily declining. Last week, most tech stocks experienced a significant decline – meaning a 10% to 20% drawdown. 

Nothing goes straight up or down. It is just as normal to have pullbacks and shakeouts during rising markets just like it is normal to have rips during declining markets. Everyone received what they wanted last week. The bulls got their pullback and therefore potentially better risk/reward entries. Let’s see if they step up next week. The bear got their crack in many tech names. Can they follow through next week? A lot will depend on interest rates and the US Dollar which have been perking up as of late. January CPI inflation report will be released on February 14th at 8:30am ET. Stocks used to sell off when Fed officials spoke and inflation data is released. Now, they are having their biggest rallies at those events. Until this changes, sentiment remains bullish and the latest rally has a chance of lasting longer.

Crude oil had a major bounce last week. Good news for energy stocks, bad news for tech. Higher crude oil means higher inflation expectations. 

The small-cap ETF – IWM, tested its 20-day EMA and it managed to hold above it. If IWM loses 188, it can drop to 183. The S&P 500 is still riding above its rising 20-day EMA. If it loses 405, it can test 400.

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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.

MarketSmith powers the charts in this video

I just published a new book. Check it out on Amazon.

So far, 2023 is a mirror image of 2022. The weakest stocks from last year are like rockets year-to-date. Anything that did well last year, has been under pressure. Clear rotation from old-economy sectors back into tech. The reason is not important. It could be a mean reversion after an over-correction; it could be the market assuming that the Fed is almost done raising rates and the economy is still strong. Even the Fed acknowledged that inflation is coming down in many sectors. This is exactly what the market has been pricing in and wanted to hear. Everything ripped higher after Powell’s comments. 

What matters more from a practical perspective is the market reaction to earnings so far this quarter. Every single mega-cap tech company either reported earnings below estimates or guided lower. The market didn’t care. Even disaster earnings reports like Intel, Goldman, and Snapchat could not hold them down for too long. The market is sending a clear message. It’s as if it is saying that the reports were so bad that they can only get better from here. The sentiment is extremely bullish. Any bad news is considered temporary and a reflection of past events. Any good news is considered an argument that things are getting better.

Keep in mind that morning shakeouts are normal in any market environment. During bear markets, we can often see a gap up and then a selloff with a weak close. During bull markets, we can see a gap down or quick dip at the open, and then a rally with a strong close. Every slight dip is getting bought in tech stocks lately. The number of accumulation days has been expanding quickly too. Up days are plentiful and on much higher volume. Down days have been rare and on low volume. This is a bullish market behavior. It’s anyone’s guess how long it is going to last. The indexes are certainly extended above their short-term moving averages (10 and 20dma). They can resolve that by either pulling back or going sideways – the so-called time consolidation. Everyone knows the saying “don’t find the Fed”. There’s an even more accurate expression about this tape – “don’t fight the market”. Obviously, that doesn’t mean blindly chasing extended setups where you have to risk $5 to make $2 potentially.

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.