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MarketSmith powers the charts in this video

April CPI came as anticipated – 4.9% year over year and 0.4% month over month. Inflation is slowly receding. This is exactly what the market has been expecting and pricing so far in 2023. As a result, tech stocks have been outperforming the rest of the sectors year-to-date. Large caps have been outperforming small caps. 

There is something for everyone in this market. There are solid bearish and bullish arguments and each can easily play out. Our job is to remain open-minded and be ready to adjust to any major change in the tape. Last week was a microcosm of the tape year-to-date. There were some great opportunities on the long side – AMD, GOOGL, AMZN, SE, etc. There were some great opportunities on the short side as well – almost anything commodity-related was smoked, including Bitcoin if it can be considered a digital commodity. 

The biggest current narrative is that a few mega-cap tech stocks have been propping the indexes higher while the majority of stocks have been under pressure in the past couple of months. It has been a thin market with more stocks making new lows than new highs. Typically such bearish divergences lead to a correction for the entire market but they are sometimes resolved through sector rotation. I wouldn’t exclude either scenario. 

The main bullish argument is that despite declining earnings, the banking crisis, and debt ceiling rhetoric, the large-cap indexes are holding remarkably well. The Nasdaq Composite Index which consists of over 3000 stocks is trading above its 20, 50, and 200-day moving averages. The dips in SPY to its 50-day moving average are still welcomed as buying opportunities. 

Solar stock woke up on Friday. FSLR closed strong. The big question is if it can add to its gains. The follow-throughs to the upside have been limited as of late. 

I don’t believe this is a tape to be overly aggressive. I continue to try with small positions with mixed results. The tape is neither bearish or bullish. It’s a market of stocks environment where equity selection and being nimble matters. 

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MarketSmith powers the charts in this video

Considering the current headwinds, the U.S. stock market is holding impressively well. The Fed raised the benchmark interest rate to 5-5.25% and hinted it might be the last hike this year. SPY pulled back to its 50-day moving average. QQQ pulled back to its 20-day moving average. Both bounced strongly on Friday after a much stronger-than-expected jobs report. Employment is a lagging indicator. It seems the market is not thinking that far ahead and considers it as proof that the economy is still vibrant despite 10 rate hikes in 14 months. 

There is a new regional bank going under every week. It turns out they all did the same thing and have huge unrealized losses in long-term Treasuries. The genie is out of the bottle and people are moving their money requiring a 4-5% yield or the perceived safety of the biggest banks. While financials have taken a hit this year, the impact on the overall market has been negligible. This is one resilient market. 

Earnings reports continue to come hot. There’s no earnings and sales growth but everyone is beating the massively lowered analysts’ estimates. Either the analysts are really bad at estimating or the market simply chooses not to care about the lack of growth. It prefers to focus on the potential for future growth 6-9 months down the road. Apple is a good recent example and it represents many other similar cases. They reported 0% earnings growth and a second consecutive quarter of negative sales growth. How is that bullish in an environment of 5%+ inflation? The net result was a breakout and trading less than 5% off its all-time highs. Going up on bad news is bullish, at least in the short-term. 

This year, the so-called “sell in May and go away” hasn’t materialized yet. Plenty of stocks have remained very resilient. The A.I. theme is one of the strongest – NVDA and MSFT are the clear leaders. AMD could be another that joins them. Bitcoin continues to hover near 30k. If it breaks out, it will help stocks like RIOT, MARA, and MSTR bounce higher. Fast food restaurants are crushing estimates and breaking out higher – CMG, WING. Medical device stocks are having one of their best quarters – ISRG, SWAV, LNTH, PROF, etc. Even the biotech sector has staged a massive rally in the past few weeks. As of now, it is a market of stocks that is correcting through sector rotation.

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

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.

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.