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MarketSmith powers the charts in this video

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So far, 2023 is a mirror image of 2022. The weakest stocks from last year are like rockets year-to-date. Anything that did well last year, has been under pressure. Clear rotation from old-economy sectors back into tech. The reason is not important. It could be a mean reversion after an over-correction; it could be the market assuming that the Fed is almost done raising rates and the economy is still strong. Even the Fed acknowledged that inflation is coming down in many sectors. This is exactly what the market has been pricing in and wanted to hear. Everything ripped higher after Powell’s comments. 

What matters more from a practical perspective is the market reaction to earnings so far this quarter. Every single mega-cap tech company either reported earnings below estimates or guided lower. The market didn’t care. Even disaster earnings reports like Intel, Goldman, and Snapchat could not hold them down for too long. The market is sending a clear message. It’s as if it is saying that the reports were so bad that they can only get better from here. The sentiment is extremely bullish. Any bad news is considered temporary and a reflection of past events. Any good news is considered an argument that things are getting better.

Keep in mind that morning shakeouts are normal in any market environment. During bear markets, we can often see a gap up and then a selloff with a weak close. During bull markets, we can see a gap down or quick dip at the open, and then a rally with a strong close. Every slight dip is getting bought in tech stocks lately. The number of accumulation days has been expanding quickly too. Up days are plentiful and on much higher volume. Down days have been rare and on low volume. This is a bullish market behavior. It’s anyone’s guess how long it is going to last. The indexes are certainly extended above their short-term moving averages (10 and 20dma). They can resolve that by either pulling back or going sideways – the so-called time consolidation. Everyone knows the saying “don’t find the Fed”. There’s an even more accurate expression about this tape – “don’t fight the market”. Obviously, that doesn’t mean blindly chasing extended setups where you have to risk $5 to make $2 potentially.

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MarketSmith powers the charts in this video

I just published a new book. Check it out on Amazon.

There have been the occasional dips that shake people out but for the most part, the rally has remained very strong as the market has decided to brush aside any bad news and focus on the good news. Is it sustainable? Is it just another bear market rally or is this the beginning of a new powerful uptrend? Nobody knows. What we know is that the vast majority of the biggest short-term movers have come from stocks trading near their 52-week lows and around their 200-day moving average; not from the stocks trading near their 52-week highs. This is normal for both a bear market rally and the beginning stages of a new bull. At the lows of the last big bear market in March 2009, there are only a few stocks that made new 52-week highs and then outperformed. We had Autozone, Netflix, and Green Mountain Coffee Roasters. All of them went nowhere in the following 4-5 months while the stocks that bounced from their 52-week lows doubled, tripled, and quadrupled. It took about six months after the March 2009 lows to see proper setups near the 52-week high list which started to outperform from there. 

Apple, Amazon, Google, Meta, AMD, and hundreds more are reporting next week but the real market-moving event is the FOMC meeting and press conference on Wednesday – Feb 1st. The current market consensus is that the Fed will acknowledge that inflation is slowing down, it will probably only raise the benchmark interest rate by only 25bps and send the message that further changes will be based on inflation and employment data. The market has priced in a less hawkish Fed just like the last few times. One of these days it will get it right.

Financial markets tend to move in a direction that will surprise the majority in the short-term. I don’t know what would be more surprising next week. There are still plenty of people that don’t believe this rally and are underinvested, over-hedged, or short. There’s definitely fuel to prop up the rocket higher. It is also true that the indexes have had a very robust January so far and even some elements of FOMO and chasing silly prices. A quick shakeout would not be out of the question either. Even the strongest bull markets are filled with many shakeouts. I am not sure we are in one. Holding winners is never easy. This is why I prefer to trade around them.

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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.

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

I just published a new book. Check it out on Amazon.

Most stocks had a normal pullback to their 20-day moving average in the middle of last week. The dip was bought again and most finished near the highs of their weekly range. The bulls are still in control. Two factors might derail the current rally:

1. A large number of worse-than-expected earnings. Many companies have already guided lower several times in the past six months or so. It will take a really big earnings miss like the one Goldman Sachs had, to see lower prices. For the most part, the market is in the mood to look for the silver lining this earnings season, at least when comes to tech stocks. Just look at the reaction to Netflix’s earnings. They missed earnings by a mile and yet their stock went higher. The market decided to pay attention to a subscriber’s growth, which makes sense because it is a reflection of potential future earnings growth. As we all know, the market is forward-looking.
2. Most major central banks around the world are likely to continue to tighten monetary conditions, especially the ECB and the Fed. They are certainly the biggest wall of worry to climb. 

In the meantime, it seems the stock of every company that announced layoffs is going up. Wall Street is sending a clear message: cut costs and improve efficiency to prepare for a potential recession. Seeing the positive market reaction, more CEOs are likely to follow the same example. Even if a recession doesn’t materialize, the companies will emerge stronger. This is why the market is reacting favorably – GOOGL, MSFT CRM, AMZN, COIN.

The real earnings season starts next week with hundreds of companies reporting. Some of the more interesting reports include TSLA, MSFT, V, MA, ASML, TXN, IBM, ISRG, etc. 

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.

Disclaimer: Everything I share is for educational and informational purposes only and it should not be considered financial advice.