MarketSmith powers the charts in this video
The indexes remain resilient. QQQ is up 20% year to date. SPY is up 8%. And yet, participation hasn’t been widespread and very few breakouts have led to a follow-through. If you are underperforming the indexes ( I am), you should ask yourself the question – is the market really too thin or are you fishing in the wrong ponds? More importantly, are you chasing breakouts to new 52-week highs? Because they have not been working too well in this market. Most breakouts tend to work well in a typical bullish environment where a proper entry is followed by a 15-20% upside move. When you have a cushion like this, it is a lot easier to withstand normal pullbacks and even add to your position. The current market doesn’t fit the term “typical”. The indexes are rising, some industries are rising, and yet most typical breakouts are often immediately followed by quick shake-outs – quick and violent pullbacks hitting most stops. The one approach that still continues to work right now is buying dips in strong stocks to their 20, 50, and 200-day moving averages. They offer higher success rate and higher profit factors (reward vs risk taken). Don’t buy those dips blindly. Wait for a move above the previous day’s high. Keep in mind that the beauty and the challenge of the stock market is that as soon as enough people figure it out, it often changes again.
In the meantime, the earning season has led to some sizable moves. Big tech crushed the already lowered estimates. META and MSFT broke out to new 52-week highs. GOOGL and AMZN didn’t sell off and continue to set up. NFLX didn’t break down. TSLA tested its January earnings gap where it found buyers. Mega caps stocks are acting constructively and holding the indexes afloat. Three other trends that are standing out this season are notable strength and favorable market reaction to restaurants, homebuilders, and consumer staples earnings reports.
FOMC is on Wednesday (May 3rd). The expectations are for one last 25bps rate increase and confirming that the benchmark rates should remain around 5% until the rest of the year. We know the Fed is not going to be more hawkish than that. The odds are low that it is going to be more dovish than that either. Overall, I don’t really expect any surprises from this meeting. As usual, the market will be super volatile on Wednesday afternoon and we will learn about the actual market reaction the next day. Expected or not, those events can play the role of big pivots. Last week, we saw a quick pullback to QQQ and SPY’s 10-week moving average which ended up being a bear trap. The indexes closed strong near their highs of the week. Can a potential breakout next week end up being a bull trap? I wouldn’t be surprised so I will take things one day at a time and have an open mind.
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