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MarketSmith powers the charts in this video

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Many tech stocks have been on fire since the start of the year as inflation expectations have been steadily declining. Last week, most tech stocks experienced a significant decline – meaning a 10% to 20% drawdown. 

Nothing goes straight up or down. It is just as normal to have pullbacks and shakeouts during rising markets just like it is normal to have rips during declining markets. Everyone received what they wanted last week. The bulls got their pullback and therefore potentially better risk/reward entries. Let’s see if they step up next week. The bear got their crack in many tech names. Can they follow through next week? A lot will depend on interest rates and the US Dollar which have been perking up as of late. January CPI inflation report will be released on February 14th at 8:30am ET. Stocks used to sell off when Fed officials spoke and inflation data is released. Now, they are having their biggest rallies at those events. Until this changes, sentiment remains bullish and the latest rally has a chance of lasting longer.

Crude oil had a major bounce last week. Good news for energy stocks, bad news for tech. Higher crude oil means higher inflation expectations. 

The small-cap ETF – IWM, tested its 20-day EMA and it managed to hold above it. If IWM loses 188, it can drop to 183. The S&P 500 is still riding above its rising 20-day EMA. If it loses 405, it can test 400.

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MarketSmith powers the charts in this video

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

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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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.

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.

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.