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MarketSmith powers the charts in this video.

After a slight pullback early in the week, most stocks bounced and closed strong. This time it wasn’t just about tech names. Other sectors also woke up and started to participate in the rally. Market breadth is improving. The S&P 500 is back to the same level where the Fed started raising rates 5% ago. This is truly impressive. Some say it’s about A.I. but we know it is not as simple as that. There are other factors at play. The debt ceiling is likely to be raised again. The economy is still strong. There are plenty of job openings. Commodity prices have been declining for months which has helped with reducing inflation expectations. No one is talking about the Fed and inflation anymore. All the rage is about A.I. and how it could impact productivity and innovation in many businesses. I don’t know if it’s just a fad. If it isn’t, we are still in the early stages and there are plenty of big movers left in the market.

The month of May passed and the buyers haven’t gone away. They are actually expanding. Quite a few companies which had significant downside gaps after earnings have fully recovered. Others are having big upside gaps and are holding them for the most part. This is bullish market behavior. How did we go from “the market is being carried by only a few stocks” and “market breadth is terrible under the surface” to “it’s a bull market”? As the cliche goes – the change happened first slowly, and then suddenly. It started with a few mega-caps. Then, other tech stocks joined. And most recently, other sectors are trying to bounce as well. You don’t fight the tape in such a situation. You find a way to participate. This is what I did when I bought SPXL last Thursday alongside my smaller option trades. Keep in mind that small caps just closed above their 200dma. If this rally has more room, we are yet to see big moves. As usual, not everything will be moving at the same time and at the same pace. There will be plenty of shakeouts, upside gaps followed by intraday selloffs and then recoveries, downside gaps followed by recoveries, and violent pullback to 10 and 20-day EMAs. How do I know this? This is how typically bull markets behave. Trading seems easy only in hindsight. At some point, enough people will turn bullish and we will see signs of complacency in the market. Some might even argue that those signs are already here. This is when the proverbial rug will be pulled.

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MarketSmith powers the charts in this video.

Last week started with a quick shakeout. QQQ pulled back to its 10-day EMA. Then, Nvidia reported earnings and jump-started a massive rally. This time, the bull run didn’t impact only the usual suspects – NVDA, AMD, MSFT, GOOGL, META, AI, SMCI, SYM but it stretched into many more names – AVGO, ADBE, AMZN, TSLA, COHR, ANET, TEAM, etc. The entire tech sector is in a strong uptrend. The rest of the market is lagging behind. The most interesting part about the tech power is that it is happening on the back of rising interest rates and the U.S. Dollar. The 1-month T-bills are yielding 6%. Historically, this is not considered an easy-money market environment. And yet, tech stocks can’t stop going higher.

In January when most stocks were going up, I joked that either the market believes that inflation is coming down or A.I. will have a massive impact on the economy. I didn’t really believe the latter at the time. My joke turned out to be a reality. There’s a chance that A.I. will influence our lives to the same degree that the Internet did in the late 90s. If this is true, we are in just the first or second inning of the action. The bulk of the moves, which will surely feel like irrational exuberance to many, is yet to come. Don’t get me wrong – there will be some quick, random, and violent pullbacks in A.I.-related names that will shake many people out but the dips are likely to get bought eventually. Those dips are not likely to come when almost everyone is expecting them. Many hoped that Nvidia will pull back after earnings so they can jump on the A.I. train. You know what happened. NVDA gapped up 30%, the biggest post-earnings gap for a mega-cap stock. Those dips will come when you least expect them and you are completely confident in the invincibility of the A.I. story. They will be so scary that you will question the A.I. narrative. This will be the time when the best risk-reward entry points will appear.

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

A few times every single year, market conditions are ripe to extract extraordinary returns while you can risk very little. They usually last a few weeks before trading profitably becomes significantly more challenging. Recognizing those special times is a valuable skill because they can account for more than 90% of our returns for the year. There are times to go long, times to go short, times to go fishing, and times to really get aggressive in the market. The opportunities that the market offered in the past two weeks were exceptional. Driven by the A.I. frenzy, stocks like NVDA, AMD, NFLX, GOOGL, AMZN, META, and MSFT made remarkable short-term moves. Those names offer all the liquidity in the world and one can easily build a sizable option position in them. Risk very little to make a lot. I managed to participate in some of those setups but I certainly wasn’t as aggressive as I should’ve been. I took partial profits too soon and I didn’t add to my winners. Maybe it is my traveling through Europe. Maybe, I didn’t recognize how special those opportunities were because I paid too much attention to scary macro rhetoric about the debt ceiling, recession, the Fed, small caps, and weak market breadth. Or maybe, hindsight is 20/20. I’d like to believe that proper preparation which includes staying in the right mindset can make a big difference. 

Last week, we finally saw the rally spilling beyond mega-caps. Semiconductors had one of their best weeks this year. SMH closed at new 52-week highs. Stocks like MU, RMBS, and LRCX had major breakouts and followed through. Software stocks also made outstanding moves: NOW, SPLK, GLBE, NET, SMAR, etc. What’s interesting is that all that tech strength happened in the face of rapidly rising interest rates and the US Dollar. Those used to be major headwinds for stocks last year. It seems correlations and narratives have changed this time, at least for now.

The most important question is what’s next. No one knows with certainty, of course. My understanding is that all of a sudden many of the recent leaders are looking extended and I wouldn’t be surprised if we see some form of consolidation. They can either pull back toward their 10, 20, and 50-day moving averages or go sideways in a tight range until another catalyst appears. If this is a real breakout in QQQ, we should see money flowing into other stocks.

NVDA has been the top stock of 2023, riding on the coattails of A.I. It’s priced to perfection so I don’t expect a big upside surprise. Any potential dip will likely be bought as many institutions view it as a long-term A.I. play and some haven’t built their positions in it. It is expensive by many measures but sometimes perceived scarcity is much more important than valuation.

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.