Momentum Monday – Sector Rotation

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We saw a clear rotation into defensive sectors in the past week. Healthcare, utilities, and consumer staples – lower-beta stocks that pay relatively high dividends notably outperformed anything else. This happens when interest rates pull back and the market expects an economic slowdown. In the meantime, most momentum stocks, especially tech stocks, had quick pullbacks. We will know soon enough if this was just a temporary hiccup or the beginning of a bigger pullback. Mega-cap tech stocks remain harbors of perceived safety. GOOGL, AAPL, MSFT, META continue to show notable relative strength. This can also be interpreted as a defensive market move.

Inflation expectations have been gradually decreasing so far this year. The Fed officials like to regularly remind us that they are not done fighting high inflation. And they might have their point. OPEC cut oil production which cause a big upside gap in oil last week. Let’s see if this gap can follow through. There hasn’t been a lot of buying after the gap. Contrast this to the price action in gold, which after its big gap on March 13 hasn’t looked back turning gold miner stocks into momentum vehicles. They are all extended from a swing trading perspective and need some time to potentially set up again.

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Momentum Monday – Tech Dominance in Q1

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The bulls won the first quarter of the year and it wasn’t even close; especially when it comes to tech stocks. The Nasdaq 100 (QQQ) gained 21%, the semiconductor ETF, SMH was up 31%. The best performers year-to-date are three of the worst performers from last year: NVDA (+90%), META (+76%), and TSLA (+68%). All of this happened in the midst of mostly weak earnings that came well below estimates, the Fed raising the benchmark interest rate to 5% and talking about a potential recession later in the year, several big banks going bankrupt, and commercial real estate stocks enduring a massive correction. This is one resilient market that swept away all bad news and decided to focus on what could go right. 

They say don’t fight the Fed but one should also don’t fight the market either. Rising prices lead to FOMO and FOMO leads to short-squeezes. Anything with high-short interest was on absolute fire last week: AI, UPST, MSTR, DOCN, MBLY, WWE, etc. and this process might be just beginning. 

Obviously, not everything is perfect. Small caps, IWM is still below its 200-day moving average. Financial and commercial real estate stocks are still looking vulnerable. And yet, there’s plenty to be optimistic about – at least when it comes to the price action in tech stocks. The big question is if everyone is turning bullish and starting to chase breakouts just before the proverbial rug is pulled again. No one really knows. If you see a good long setup, take it with half size. If you see 3 out of 5 working as anticipated, the odds are this trading environment is favorable for long swings. 

We will have to see some selling first before we consider turning bearish. All the negative macro talk has turned many people too bearish while the price action has been predominantly bullish, especially in tech. Maybe, the bears end up being right at some point this year, but we will receive plenty of evidence before that happens. A correction doesn’t happen overnight. They take time to develop and provide many clues along the way. There’s no reason to guess when and to stay scared out of the market when price action doesn’t suggest so.

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Big-volume Breakout in BABA

Chart by MarketSmith

Alibaba (BABA) announced that they are going to split the group into six companies. The stock (BABA) gapped up and after a brief test of its morning lows around 92, it went above its intraday VWAP, set up, and provided a low-risk entry. Then it trended higher for the rest of the day while most tech stocks were under pressure. It has the potential to continue higher tomorrow on a red-to-green move. This is how we played it:

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