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MarketSurge powers the charts in this video.

The small-caps Russell 2k finally closed at new 52-week highs. The recent drop in interest rates is an essential factor. IWM has been making higher lows and higher highs above its rising 50-day moving average and it is now setting up for a major breakout above 206. If this happens, it will only accelerate the current risk-on mentality. There’s always the chance of a false breakout but it would play out in several days, even weeks. For example, if IWM goes 210 and then quickly reverses below 200 and then below 195, we might see a swift downside move. As of now, things are pointing higher, and more stocks are likely to join the current melt-up that we are experiencing in the market. 

This rally is not just about semiconductors which have been the clear leader year to date. Software, biotech, retailers, and industrials have also been advancing steadily. Even energy stocks are trying to break out. Gold is setting up for a potential breakout from a multi-year base. Bitcoin and anything crypto-related has been in a steep uptrend. 

I have to point out that it’s not just milk and honey, roses and butterflies in the current tape. In the past couple of weeks, we finally saw some stocks selling off after strong earnings reports and weak guidance – SNOW, PANW. This is something to keep an eye on if it expands into more stocks because it could be a sign of a topping behavior. It only comes to remind us that bull markets tend to be low-correlation markets of stocks, where most stocks go up and not all of them. As the saying goes, stocks tend to top individually and bottom as a group.

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MarketSurge powers the charts in this video.

If you didn’t know that market seasonality is currently bearish would you even consider the bearish side right now? 

Let’s look at the facts. What is the history of market weakness so far in 2024? 

The year started with one week of selling on low volume as everyone was overly exuberant at the end of last year. Then QQQ and SPY bounced quickly and made new all-time highs within two weeks.

At the January FOMC meeting, the Fed alluded that they don’t plan to cut rates until May. There was a one-day selloff. QQQ and SPY recovered to new highs two days later.

Last week, CPI came above the estimates. There was a one-day selloff. QQQ and SPY closed the selloff gap within two days but haven’t made new highs yet. 

On Friday, PPI came above estimates. Most stocks sold off and finished near the lows of their daily range. This could potentially be the start of a minor pullback in the market. The key is seeing a follow-through. So far this year, any slight dips have been bought. We will know soon enough if anything has changed. 

In the meantime, any company that is remotely related to AI crushed earnings estimates and went higher – mostly semiconductors and software. We have also seen so many positive earnings reactions across various industries – fast food, apparel, shoes, transportation, industrials, biotech, medical devices, advertising, crypto, etc. The midcap ETF, MDY broke out from a long base. The small-cap ETF, IWM has been volatile but also making higher lows above a rising 50dma and setting up for a potential breakout near 205. These are all bullish developments. There will always be something to worry about but that doesn’t mean that you should get bearish without any price evidence for it.  

The big question you should ask yourself is – are you losing the big picture just because you are preparing for a 3-5% seasonal pullback? People seem so afraid of missing out on the next correction that they might not be benefiting enough from the current rally. Of course, it’ll end at some point and we will have a correction but there’s no price evidence that one is currently underway. The one thing to keep in mind for the next week is that the second half of February tends to be seasonally weak, especially after monthly option expiration. Being nimble and more selective in the next couple of weeks would make sense. 

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MarketSurge powers the charts in this video.

The S&P 500 and the Nasdaq 100 closed at a new all-time high again. The mid-cap ETF, MDY is setting up for a potential breakout out of a long multi-week base. Small-cap stocks are also starting to wake up. And yet, there seems to be a solid dose of negative sentiment. I love skepticism during bull markets because every trend needs disbelievers.

People are citing bearish momentum divergences as the major reason. The number of S&P 500 stocks above their 200 and 50dma is decreasing while the index is making new highs. This is how indexes topped in the past. The trouble is that timing a top is a lot tougher than capturing a bottom because stocks top as individuals and bottom as a group. A bearish divergence can continue a lot longer than most expect and can resolve in two ways: We can see an expansion of the rally as more stocks participate. This happened last year in May and June. Or we can see a correction and most stocks pull back.

From where I stand, both scenarios are equally plausible right now. More stocks joining the rally mean more and better opportunities in faster-moving stocks. A correction means lower prices in the strongest companies – so many investors are dreaming about buying pullbacks in the strongest semiconductor and software stocks. Any dips will offer better risk-to-reward opportunities. 

What would make me bearish is an increase in distribution days.  Stocks falling on big volume for multiple days is a sign of distribution or institutional selling. We haven’t seen that yet. Stocks making lower highs and lower lows in the time frame of your interest – be it weekly, daily, or hourly is what would make me take on some short or buy put options. It’s as simple as that. Before those occurrences, bearish divergences don’t matter. They can continue a lot longer than most expect. As legendary investor, Peter Lynch said: “Far more money has been lost while preparing for a correction than during the corrections themselves”.

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.