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The tape has been choppy lately. Green days are followed by red days and vice versa. Most breakouts are fizzling quickly. If you are not nimble enough to sell on strength, you are stuck holding the bag. I don’t know if Friday’s selling was due to monthly option expiration but many stocks are looking vulnerable on multiple time frames. The odds are that most people are now bearish and the market tends to surprise the majority. Wednesday’s FOMC can bring extra volatility and lead to a change in direction. 

There is a Federal Reserve meeting next week. No one in their right mind expects the Fed to cut the rates given the recent uptick in inflation and jump in energy prices. The consensus is for no change. The second most popular opinion is for a 25bps rise. I also think no change is the most likely scenario. None of that really matters. What’s important is how the market will react. Lately, the market has been searching for direction as there has been more selling than buying under the surface. 

There’s a new sector rotation almost every week. The one constant recently has been the strength in the energy sector – not only oil & gas stocks but also uranium and coal. I wouldn’t chase them here. Most energy stocks are extended and currently don’t offer tight-risk entries. Financials also woke up last week. The vast majority of financials beat earnings estimates this quarter and went higher after their reports. Then August came and all pulled back. Now, they are starting to perk up again. I’ll be watching for setups.

The current tape is volatile, setups are sloppy. We have to take things one step at a time and adjust to whatever the market sends. There are still decent ideas popping up but one has to be quick to take gains. In a tape like this, it makes sense to trade less and with a smaller position size. This is not the time to be aggressive, either long or short.

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Market breadth has been deteriorating. 10-15 large-cap stocks account for the majority of the indexes’ gains year-to-date. Typically weak market breadth precedes market weakness but not always. The last time rally participation was small back in March/April, we saw an expansion into more sectors. This time we have weak seasonality so things might play out differently.

The Nasdaq 100 and S&P 500 held above their 20-day moving averages. If they lose them, we will probably see an acceleration in selling. A lot will depend on market rates. The 10-year rates are hovering around 4.3%. A breakout there will weigh down on tech stocks. We are already seeing some of them breaking down. If NVDA loses 450, it can pull back to 435. 

AAPL was under significant pressure last week on news that China doesn’t allow Federal government employees to use iPhones at their workplace. The China/U.S. relations seem to be souring. The rally in Chinese ADRs lasted a blink of an eye. It failed quickly just like it did many times this year. U.S. officials keep saying that doing business in China is not possible for Western businesses anymore. Deriving a significant income from China is turning into a liability again. Just look at the price action in SBUX, NKE, AAPL, WYNN, LVS, and many semiconductors. 

One has to remain nimble and tactical in this choppy environment. There are decent opportunities on both the long and short side but if you don’t stay in them for too long. Stocks like ABNB, UBER, GOOGL, and AMZN are building new bases. Cyber security stocks like CRWD, ZS, OKTA, PANW, ANET are setting up for potential breakouts. September is seasonally weak so most breakouts are not likely to last for too long. It is a scalping market environment. If the indexes lose last week’s lows, I will go heavier on the short side for a quick trade.

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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.

All major indexes closed above their 20 and 50dma. Breakouts are following through for the most part – especially after earnings gaps and in high-momentum stocks. This is bullish. Nothing goes straight up. It is completely normal to see some backing and filling, some consolidation or a pullback after Labor Day weekend. As long as the indexes keep closing above their 50 and 20dma, the bulls are in charge which means that dips in strong stocks are likely to be bought.

Tech stocks started to move in tandem with interest rates again. As rates pulled back in the last couple of weeks, tech stocks rallied. As rates bounced on Friday, tech stocks faded. Even if tech takes a break here, it seems the market is more likely to correct through sector rotation as opposed to a wide-spread selling. The slack in tech on Friday was picked up by energy and metal sectors, which perked up. When those sector rally, tech is typically under pressure.

Chinese ADRs rallied again as China is injecting liquidity to jump-start its economy and stock market. It seems they are not worried about inflation over there at all. The China Internet ETF, KWEB is still a mess technically speaking but it is something I am keeping a close eye on. I traded FUTU, XPEV, BIDU during the week. FUTU weekly Calls went up 11x. 

In the meantime, high-yield stocks are getting smoked. Consumer staples and utilities are having one of their worst year in a while. People are not searching for yield in stocks anymore as Treasuries and shorter-term government bonds offer plenty of yield currently.

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.