Bull Markets Often Correct Through Sector Rotations

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This has been a very weird week of sector rotations – momentum stocks pulled back while capital rushed into old-economy sectors like finance and laggards like China and emerging markets.

Last week also brought quite a few failed breakouts and a decrease in the number of good risk-to-reward setups, which is very strange when the S&P 500 is at all-time highs. I am either looking at the wrong stocks or the market is getting weaker under the surface – maybe, it is a little bit of both.

We have seen this exact scenario play out too many times this year. It doesn’t mean that the bull market is over. It’s just another reminder that bull markets are low-correlation markets of stocks and everything looks easier in hindsight than it is in real time.

Small-caps represented by Russell 2000 (IWM) underperformed notably last week, but as long as they hold above 168, there’s nothing to fuss about from a macro perspective.

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Momentum Monday – Climbing the Chinese Wall of Worry

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Markets tend to overreact to known threats. Chinese stocks have been under severe pressure for the past six months. Most of them had a 30-50% correction. The big question this week is how much of the tariff talk has already been discounted. We are likely to find out soon. Technical bottoms are often formed when a beaten-down sector rallies on bad news.

In the meantime, U.S. stocks continue to lead the world financial markets. All major U.S. stock indexes are currently consolidating in a range. Small caps and large-cap tech stocks’ momentum seem to be losing steam, so there are no reasons to be overly aggressive on the long side right now.

On Momentum Monday, we cover QQQ, FXI, AAPL, GOOGL, ECHO, IYT, among others.

BTW, I just released a new book: Swing Trading with Options – How to trade big trends for big profits. It’s available digitally and on paper (it features more than 100 annotated colored charts on big 8×10″ format).

Keep an Eye on MOMO

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The owner of Tinder, MTCH has been on a tear ever since it crushed earnings estimates on August 7th. Almost 50% of its float was short at the time, which certainly contributed to the quick price appreciation in the past month. I wrote about the potential for a short squeeze here.

Now, the so-called “Tinder of China”, MOMO might offer a similar opportunity. MOMO had a 40% correction this summer along with many other Chinese stocks. It the past few weeks, it has managed to recover above its 50-day moving average, where it is setting up again. If it manages to break out above $48, it has a good chance to test its all-time high near $55. A lot will depend on how the U.S. – China trade negotiations go.

Momentum Monday – Still A Market of Stocks

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While Chinese stocks are in a crash mode, we continue to see strength in the U.S. stock market. Last week’s pullback in momentum names seems like another normal pullback within a bull market. They say that bull markets correct through sector rotation. This is exactly what we might be seeing currently in the market as the transportation sector broke out today. There are some many truckers clearing long bases: ECHO, ARCB, XPO, etc.

The cannabis craze has revitalized the interest in many biotechs. Today, we saw a major breakout in a large-cap stock like AMGN. Institutions are looking for a side door to participate in the growth of the cannabis industry and stocks like AMGN and TPB are perking up.

We also took a look at NDAQ, CMG, MCD, SBUX, AVAV, ROKU, etc.

Momentum Monday – The Comeback of Biotech?

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The bull market continues to rage with full force. Apple has been unstoppable after its earnings gap and it’s already a 1.1-trillion-dollar company. It is looking extended to chase here. Amazon is less than 2% away from becoming the next trillion-dollar company.

We continue to see strength in enterprise software, semiconductors, cybersecurity, retailers, and more recently – biotech. After quadrupling between 2012 and 2015, the biotech ETF, IBB has spent the last four years building a new base and it is not too far from making new all-time highs. The smaller-cap biotech ETF, XBI has already passed that milestone. The renewed interest in marijuana stocks has brought new life to the whole biotech sector. It might remain in play for a long time.