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MarketSmith powers the charts in this video.

Don’t fight the Fed, don’t fight the tape is an old trader’s saying that rings true now more than ever. It was coined in 1970 by a famed investor Martin Zweig to explain the strong correlation between Federal Reserve policy and the direction of the stock market. In his book “Winning on Wall Street’, he writes “The monetary climate – primarily the trend in interest rates and Federal Reserve policy – is the dominant factor in determining the stock market’s major direction”. 

The Fed started this rally on November 1 by signaling an end to its rate hike cycle. The Fed added fuel to the fire last week by projecting 0.75bps rate cuts in 2024 and more in 2025 and 2026. Since early November, the S&P 500 is up seven weeks in a row – something not seen since 2017. The small-cap index, Russell 2k went from a 52-week low to a 52-week high in a record 33 days. The Nasdaq Composite is basically at all-time highs after being down 33% in 2022.

What’s next? Many stocks seem quite extended at the time and can use some form of consolidation to offer better risk-to-reward entries. This doesn’t necessarily mean that a break will happen if everyone is expecting it. It’ll happen if enough people decide to take profits or short and their supply overwhelms the demand of other market participants. The market is getting ready to celebrate new all-time highs before the end of the year, if even for a day. Small caps tend to outperform at the end and the beginning of the year, so the next few weeks might offer some intriguing opportunities in select highly-shorted stocks.

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MarketSmith powers the charts in this video.

The tiny dip in mega caps was bought again. AMD and AAPL broke out. AMZN and TSLA are setting up for a potential breakout. NFLX might be ready to bounce if it clears 456-457. We saw Paramount and Warner Brothers rallying on Friday, so some of that momentum might impact Netflix as well early next week. MSFT is trying to bounce near its rising 20-day EMA. GOOGL had a huge day last Thursday after they revealed a video with the capabilities of their AI platform Gemini. Then it gave back some of its gains the next day on reports that some of the results might have been manipulated. We will know more next week. NVDA also bounced and it is back above its 20-day EMA. Going back above 480 will open a path for a test of 500. Above 505, it might attempt a run for 550.

Speculative, highly-shorted stocks remain the biggest movers. This is likely to remain the theme for the remainder of the year and early next year, as long as small caps continue to recover. Just look at the recent moves in AAOI, AFRM, IONQ, UPST. I highlighted those stocks at the very beginning of their 50-100% moves. CVNA has a short squeeze potential for the next week. Also, AEHR, IONQ, etc.

Let’s not forget there’s an FOMC meeting on Wednesday. The last one on Nov 1st kicked-started a huge rally. I wonder if this time, Powell will try to cool down market expectations about interest rate cuts next year. As always, what matters in the short-term is the market reaction; not the news.

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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.

MarketSmith powers the charts in this video.

Stock prices change when expectations change. The market expectations for interest rates have changed drastically over the past month. This is why we have seen such a tremendous rally in many stocks. The most sensitive to interest rate changes groups are the best performers since October lows – software, biotech, regional banks, biotech, etc.

The move in software and Internet stocks hasn’t been based on dreams and anticipations for a better future. Almost every major software company that reported earnings this quarter, crushed estimates and raised guidance. Most of them also gapped up and continued higher as a result. Just from last week, we saw that in ESTC, PATH, SNOW, ZS, CRWD, WDAY, etc. The software space has been extremely hot.

Small caps finally broke out above their 200-day moving average and all hell broke loose. Stocks with high short interest squeezed higher – UPST, AFRM, AAOI, COIN among many others. The speculative frenzy is on. FOMO is back in full force. I hope you have been able to participate properly. 

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.