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MarketSmith powers the charts in this video.

Inflation continues to come down. Stocks keep going up. The Nasdaq 100 just had one of its best quarters in history. A.I. and falling inflation have truly changed the market sentiment and the way companies spend. I don’t know if the current move has fundamental merits or if it is rational. I don’t know how long it is going to last. No one knows. Two things make sense in this tape:

1. Don’t fight uptrends. More money has been lost anticipating corrections than during the corrections themselves.
2. Don’t chase extended stocks. Find a low-risk entry point to participate. How to find one. Every time a rising stock has a pullback to its 10, 20, or 50-day moving average, it offers a low-risk opportunity where we can risk $1 to make $3-10. We don’t know in advance which ones are going to work but this is not the important part. What matters is quickly closing the positions that hit our stops, holding the ones that work, and even adding to the winners. It’s a very simple concept but it takes time and deliberate effort to train our mind to behave in a way that makes us money in financial markets. Setups and indicators have never been the solution in trading. You can have the best setups and the most sophisticated indicators and analysis and still underperform the S&P 500. 

So what can stop this bull market? This is probably not the right question to ask. There is always something to worry about. If there aren’t, there wouldn’t be any buyers left. The Fed might decide that inflation is not coming down fast enough or it might perk up again and keep raising rates. Corporate earnings might not reflect the cheerful projections that the market has priced in. There are always many reasons but knowing about them is not going to make you money. There will matter when they matter and we will see it in the price action. No reason to guess when. The biggest risk for a money manager during a bull market is not participating in it properly – being underinvested or underperforming. This is why the dips in strong stocks tend to get bought.

Bull markets often correct through sector rotation. There was a glimpse of it last week. On the day tech stocks were under pressure, financials and energy stocks stepped up. Those rotations are bullish because they reveal that capital is not leaving the market but merely moving into better opportunities.

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MarketSmith powers the charts in this video.

Nothing goes straight up. It is normal to see the indexes pulling back to their 10 and 20-day moving averages after their strong push since May. It is exactly what happened last week. Small caps ETF, IWM had a bigger decline and is close to its 50-day moving average. The big leader this year, Nasdaq 100 (QQQ) is still above its 10-day moving average, which is another sign of relative strength – it barely pulled back. The fiscal quarter ends next week and we might see even more strength in big tech names due to window dressing.

Many stocks are already down 15-20% in the past 4 to 8 days in a row which in a bull market is a good potential for a bounce setup. Such dips to rising 20 and 50-day moving averages offer low-risk entry points, where we can risk $1 to potentially make $3 or more. I don’t like to buy weakness in an uptrend blindly. I prefer to see some evidence that buyers are coming back in control. At the very least, I want to see a stock trading above its previous day’s high or above the VWAP (volume-weighted average price) from its recent high.

Price action has started to slow down lately which is typical for the summer. I believe the overall uptrend in most large and mega-cap stocks is still firmly intact. The recent pullback is a consolidation and probably ends up as a good buying opportunity. The next earnings season is a whole month away, so it makes sense to focus on stocks showing relative strength and weakness for finding new ideas.

Bitcoin and Bitcoin-related stocks were on the move last week as the market is pricing in the potential approval of BTC ETF. The futures ETF was approved. The spot one is on its way. Bitcoin miners, MARA and RIOT are looking constructively on a weekly time frame. One cap considers them as longer-term position trade setups with a stop at last week’s low and a target 3-4x higher.

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.

Every uptrend needs skeptics and doubters; otherwise, they would not be anyone left to buy. Many managers have been skeptical of this rally and are now in the precarious position of being underinvested during a slow melt-up. This is a recipe for performance chasing towards the end of the quarter. Those who don’t want to chase extended tech names, might opt in for stocks that haven’t run as much. This is why we saw an improvement in market breadth last week and stocks like SBUX, NKE, COST to perk up. Bull markets often correct through sector rotations. While one group of stocks is consolidating gains, another might run.

Sector rotations don’t exclude the indexes mean-reverting in some form. Nothing goes straight up, even Nvidia. SPY and QQQ have become quite extended. It would be completely normal if they test their 20 or even their 50-day moving average at some point. When SPY pulls back 5%, a high-octane momentum stock could pull back 20%. Not everyone is prepared for this kind of volatility. 

The uptrend is not just a US phenomenon. Europe, Latin America, and Japan also have been running higher. Even China is trying to bounce after their central bank cut rates twice last week. It’s as if the market likes a non-zero interest rates environment better because it means that companies will utilize their capital in a more efficient manner. Last year, everyone talked about the threat of rising rates. This year, no one is even mentioning rates anymore. The Fed kept the benchmark rates at 5.25% and signaled that it might stay there until the end of the year. The stock market yawned and continued higher. The bull is running strong while the VIX is crashing. No doubt about it. Don’t get too drunk on bullishness. As usual, chasing extended stocks doesn’t have a positive edge, so one should never attempt to do. Yes, you can get occasionally lucky, but in the long-term chasing is not going to make money, especially if you are not quick with taking small losses. 

We certainly saw some elements of froth – sizable short-term moves due to a short squeeze and fear of missing out. Even the IPO market is reopening. The Mediterranean restaurant chain CAVA opened 100% above its listing price. People are hungry for new stocks. Wall Street printing press will oblige. I am still surprised that we haven’t seen at least several A.I.-related stocks going public. Either someone at Goldman and Merryl is sleeping at the wheel or there aren’t enough pure A.I. businesses. They are coming though. Alongside them, we are likely to see some long-awaited IPOs like Stripe too.

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.