Category: Uncategorized

MarketSmith powers the charts in this video.

The lock-out rally continued with full force and didn’t involve only the so-called Magnificent 7 stocks – NVDA, AAPL, AMZN, GOOGL, MSFT, META, TSLA. Anything tech-related was on fire – semiconductors, software, communication stocks. The dips were shallow and they were bought again. It only makes sense for large caps to lead right now. If most institutions are underinvested, then the fastest way to get into the market is via liquid large caps. 

Small caps continue to be the much weaker part of the market. Russell 2000 ETF, IWM lost 3% for the week. It found resistance near its declining 50dma. Can the overall market rally continue without small caps? Anything is possible. I don’t think it’s very likely. If this rally has more room to run, we will eventually see some rotation into small caps. We saw it happen last summer when large caps led the way breaking out in mid-May. Then small caps joined a couple of weeks later in early June. If the same scenario plays out again, the best is yet to come on the long side. 

There’s always a chance that small caps continue lower and the current stock rally will fizzle. A lot will depend on interest rates. Any spike in yields will be a big headwind. As of now, the trend for QQQ and SPY is up, the bulls are in control. It’ll take more than one distribution day to shake people out. The pain trade is still higher because almost no one believes in the sustainability of this rally. I don’t believe in it either but I am not fighting it. I’ve made sure that I am participating because the market doesn’t care about our feelings and expectations.

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.

MarketSmith powers the charts in this video.

Last week, we talked about the potential for the FOMC meeting to become pivotal for a market bounce. This is exactly what happened. Sentiment changed after the FOMC meeting. Powell finally said that the current risks are balanced between inflation and a recession. This means that the Fed is not likely to touch interest rates in the foreseeable future unless something breaks. This was enough for the stock market to rip higher. In the meantime, interest rates and the U.S. Dollar pulled back which is usually a green light for stocks.

A few days into this bounce, one can clearly see that the worst-hit groups in the past three months outperformed by a significant margin. Typically junk outperforms either during bear market rallies or after a deep and long market correction. It can easily be the former, but we are going to give the benefit of the doubt to this rally until we see some evidence of heavy selling. 

The silver lining of last week is that there were several back-to-back high-volume accumulation days in the small-cap index – something we haven’t seen since June of this year when the stock market started its big summer rally. Another potential tailwind for the current bounce is the overall reluctance to believe in it after so many failed follow-through days in the past few months. The majority of market participants are underinvested, short, or want to get short. The first group is praying for a dip so it can enter with a tighter stop. This is not a bad approach, the problem is that when it finally happens, many will be too afraid to pull the trigger. 

Keep in mind that the indexes haven’t made a higher high yet. They are up several days in a row, so it’s only normal if there’s some form of consolidation sometime soon. The new leaders will stand out during that consolidation. 

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.

MarketSmith powers the charts in this video.

When the market is bullish, it is looking for the slightest reason to go up. We saw that in October of 2022 and January 2023, when earnings reports and growth were lackluster, and yet, many stocks rallied. We are seeing the opposite now. Company after company from various industries reported much better than expected earnings and raised guidance. And yet, they were all sold off for the most part. I pay attention to the earnings reactions because the market is forward-looking and often sees/discounts things that might not be so obvious right now. Google, Meta, and Microsoft crushed estimates and still traded lower. Poor reaction to good news is what causes bear markets.

I know, you keep hearing that positive seasonality is about to kick in and we will have a year-end rally. We’ve been reading the same thing for the past four weeks and most stocks have been making lower highs and lower lows. One of these days, seasonality experts will be right. I am not mocking. I am just saying that relying solely on seasonality is not a practical way to manage risk if you are actually trading or managing money.

Nothing goes straight down. The indexes are not too far from reaching oversold levels that historically led to powerful short-term bounces. Maybe the FOMC meeting next week will trigger one of those rallies? I don’t know, no one does. The sentiment is still a bit complacent considering where interest rates, oil, gold, and volatility are. Traders will be traders and we will look for opportunities regardless of the tape. Those opportunities are not the same every week. This is why we don’t have to be active every single day or use the same position size in every type of market. It’s ok to sit it out and protect capital and confidence if your approach doesn’t work in a corrective tape. It’s ok to be short if this is working for you, It’s ok to learn new tricks if the old ones are not working right now. Whatever you do, make sure that you enter asymmetric trades where your winners are at least 2x your risk. Otherwise, why are you even trading in this tape?

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.