U.S. stocks continue to climb a wall of worry. SPY is already up 20% from the Christmas lows and is quickly approaching $280, which has been a major area of technical resistance in the past year.
While tech stocks are taking a little break after a strong run in the first few weeks of the year, we are starting to see quite a few other sectors breaking out and setting up – biotech, healthcare, transportation, energy, financials. Things are almost too good to be true.
Unsurprisingly, the first test of SPY’s and QQQ’s 200-day moving averages has led to a slight pullback, but under the surface, we continue to see predominantly positive market action. The market is reacting favourably to earnings reports. Dip buyers are still eager to scoop pullbacks in strong momentum stocks.
In today’s Momentum Monday, we went over some setups in enterprise software, cybersecurity, communication devices, medical instruments, biotech, aerospace.
Correlations are decreasing, volatility is declining, the market reaction to earnings has been predominantly positive, corrections are happening via sector rotation. In other words, the U.S. stock market is back to a normalized trading environment, where stock picking matters.
Enterprise software and cannabis-related stocks continue to lead the market higher. We discuss a potential rotation into other sectors ahead. Biotech and medical devices are couple industries that are setting up.
The rally was tested last week and it passed with flying colors. Earlier in the week, we saw multiple failed breakouts in momentum names, but dip buyers managed to prevail. SPY pulled back to proverbially important $260 level and bounced. QQQ managed to hold above 160. In other words, what was considered a major resistance became support last week. This is bullish market development.
We are entering an interesting territory, where those who did not participate in the rally might become complacent and jump back in the market. The joy of missing out might turn into a fear of missing out. Tops are not made out of euphoria. They are not made out of slowing momentum either. They are made out of accelerating selling. There is no evidence of that yet. The 40 and the 50-week moving averages are the next levels of technical resistance.