Ivanhoff – Page 65 – Ivanhoff Capital

Bull markets correct through sector rotation. We see that every week. This is what keeps the market going without having any significant correction. Last week, we saw energy, industrial metals and biotech pulling back while tech mega-cap woke up, Chinese, homebuilders, and highly-shorted stocks sky-rocketed. We see a version of it every single week. Obviously, it is not going to last forever. Bull market rallies end when there’s not a single cloud in the sky but as Peter Lynch likes to say “far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than during the corrections themselves”. When we start seeing more breakdowns, we can focus on short setups. At the very least, we want to see first the major indexes (SPY, QQQ, IWM) trading below its previous week’s lows. This hasn’t happened since October.

The WSJ posted an article that a basket of the most shorted stocks is up 25% year to date. There’s a saying that a high flying stock is not going to top until the last short seller is squeezed. This is why we see a big acceleration in highly shorted stocks before they top out. GME is a good example from last week.

Every share that has ever been shorted will be covered at some point. Covering means buying. When a significant percentage of a stock’s float is short, it has a lot of short squeeze material. Short sellers cover for two main reasons:

When the stock they are shorting has been decimated and reached their target levels.
When they are forced to cover because the price of the stock they are short keep rising.

Momentum money has been going hard after the highly shorted stocks lately. Some names to keep an eye on for the next week: FUBO, SNOW, RKT, CRSR, AI, GOGO, etc.

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Momentum Monday – Stock Picker’s Market

The charts in this video are powered by MarketSmith

The two big catalysts in the past couple of months that have defined everything in the stocks market are:

The U.S. election results – clean energy stocks accelerated their ascent since then. Cannabis stocks gapped up and have been clear leaders. Semiconductors and biotech have also been extremely strong post the elections for their own unpolitical reasons. The odds are that those sectors will continue to lead in 2021 but that doesn’t mean chase them when they are up multiple days in a row. Wait for proper setups that create better risk/reward entry points – pullbacks to rising 20 day moving average or a range contraction.
The announcement of a working COVID vaccine – after Pfizer and Moderna revealed their vaccines, retailers, financials, and energy gapped up and have been among the leaders since then. Basically, they are the reasons the small-cap ETFs have done so well. Russel 2000 (IWM) doubled in 9 months since its March 2020 lows. To see a move of this magnitude, you have to go back all the way to 2009 when it took IIWM 14 months to double from its lows. Nothing goes up with such veracity in such a short period of time without having reactions along the way. Don’t be surprised to see 10-20% pullbacks in the indexes in 2021, but overall I expect those pullbacks (corrections) to be buying opportunities.

In the meantime, mega-cap stocks and many software stocks have pulled back or just moved sideways consolidating their gains from the first half of the year. I expected some of them to have strong pre-earnings rallies (AMZN, NFLX) considering their reports in the previous quarter but so far I have been wrong on that. The new earnings season officially starts next week with NFLX and a bunch of financials. After that, we have the big tech and everyone else.

PERFORMANCE

Here’s a Google spreadsheet tracking all closed option 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.