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MarketSmith powers the charts in this video.

There are two ways to approach a melt-up market:

1. Participate in it chasing momentum with one foot out the door, meaning having an exit strategy because sooner or later all trends end, depending on your time frame of operation.
2. Take profits on strength and wait for a pullback to get involved again.

One is trend following, the other is swing trading. Both approaches have their merits and can be lucrative. The price action last week was a good example of the pros and cons of both approaches. One lets you capture much bigger moves but it comes with having to go through bigger drawdowns. The other doesn’t produce huge winners but it keeps any drawdowns minimal.

Inflation continues to come down. Both, CPI and PPI came below estimates. This led to another dip in interest rates and a big rally in the stock market. Last week we saw big bounces and breakouts all around. In mega caps, mid-caps, and small caps. In tech, biotech, industrials, and financials. The US dollar pulled back to a new 52wk low. The stocks with the highest short interest went up the most. Less than a year ago, people were talking about potential bankruptcy in Caravan (CVNA). This year, it is among the best-performing stocks. At some point last week, it was up more than 800% year-to-date before giving back some of its gains. 

Bull markets often correct through sector rotation and this is exactly what we saw on Friday, when most high-beta stocks pulled back while capital went into lower-volatility sectors like healthcare and consumer staples. It is a normal part of the cycle. When there’s too much frothiness and everyone thinks it is easy to make a lot of money every day, there’s usually a rug pull to beat some sense into the chasers. 

The new earnings season has just begun. Judging by the significant increase in prices in the past three months, one can say that expectations are high. This doesn’t mean they cannot be exceeded in select cases but one has to be aware of the higher hurdle ahead. Expectations matter. We all saw what happened with bank stocks on Friday. JPM started to rise two weeks before its earnings report. They crushed estimates and gapped up, only to give their entire gain up later in the day. Profit takers overwhelmed any new demand for the stock, at least for the time being. Pay attention to how the market reacts to earnings because this will be the key for the duration of the current rally.

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Bull markets often correct through sector rotation. We might be in the midst of one. Mege-caps, which is the best-performing group year-today, is down almost 2% today while smaller caps are busing higher across the board:

Try my subscription service which includes a private Twitter feed with option and stock ideas, emails with concise market commentary and actionable swing, intraday, and position trade ideas, the Momentum 40 list of market leaders, and much more. See some of the recent testimonials.

PERFORMANCE

Here’s a Google spreadsheet tracking all closed options and stock ideas shared on my private Twitter stream and emails for subscribers.

Check out my free weekly email to get an idea of the content I share with members.

I published a new trading book recently. Check it out on Amazon.

Disclaimer: Everything I share is for educational and informational purposes only and it should not be considered financial advice.

MarketSmith powers the charts in this video.

Bull markets climb a wall of worry. The most recent threat is the resumption of interest rate increases. The 10-year yield is back above 4% and extremely close to making new year-to-date highs. Rising rates mean rising inflation expectations. If yields continue to perk up, the whole rally might crumble under their weight. 

Ever since stocks topped in October of 2021, the Nasdaq 100 (QQQ) has been highly correlated to Treasuries. When interest rates went up, QQQ went down and vice versa. This relationship continues up until April of this year when all of a sudden we saw a big divergence. Rates remained relatively subdued while QQQ skyrocketed. Now that rates are rising steadily again, QQQ is starting to feel some pressure. Rates are the single biggest factors that can define the destiny of stock prices in the long-term and they might foreshadow further yield increases by the Fed.

The other major force that has a significant impact on stocks is earnings. The next earnings season starts on Friday with a few banks reporting. Most stocks have gone up substantially higher between last and this quarter. This usually means that high expectations have been priced in and they will be hard to exceed. As always, what truly matters during earnings is the market reaction to them. In the past couple of quarters, we saw plenty of companies that missed earnings estimates and reported negative growth. It didn’t matter. Their stocks still went up. In fact, this was the single biggest and the most forward-looking factor that predicted that inflation will gradually fall. Now, it remains to see how the market will react to earnings this quarter. If we see most companies that beat estimates and then gap up and follow through higher, this bull market is likely to continue. If all of a sudden stocks start selling off despite beating earnings estimates, the correction might be just around the corner.

There’s currently no evidence that this bull market is over. It’s true that breakouts had issues following through last week and we saw a lot of fading. It’s also true that the dips in strong stocks continue to lead to great buying opportunities. We are currently in the consolidation phase as a big run. I call it range-bound trading. In this environment, one has to be very nimble when trading breakouts and take profits quickly and often. Focusing on a pullback to 20 or 50-day moving averages is likely to offer a lot better risk -to-reward especially for swing trades. 

Try my subscription service which includes a private Twitter feed with option and stock ideas, emails with concise market commentary and actionable swing, intraday, and position trade ideas, the Momentum 40 list of market leaders, and much more. See some of the recent testimonials.

PERFORMANCE

Here’s a Google spreadsheet tracking all closed options and stock ideas shared on my private Twitter stream and emails for subscribers.

Check out my free weekly email to get an idea of the content I share with members.

I published a new trading book recently. Check it out on Amazon.

Disclaimer: Everything I share is for educational and informational purposes only and it should not be considered financial advice.