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MarketSurge powers the charts in this video.

If you didn’t know that market seasonality is currently bearish would you even consider the bearish side right now? 

Let’s look at the facts. What is the history of market weakness so far in 2024? 

The year started with one week of selling on low volume as everyone was overly exuberant at the end of last year. Then QQQ and SPY bounced quickly and made new all-time highs within two weeks.

At the January FOMC meeting, the Fed alluded that they don’t plan to cut rates until May. There was a one-day selloff. QQQ and SPY recovered to new highs two days later.

Last week, CPI came above the estimates. There was a one-day selloff. QQQ and SPY closed the selloff gap within two days but haven’t made new highs yet. 

On Friday, PPI came above estimates. Most stocks sold off and finished near the lows of their daily range. This could potentially be the start of a minor pullback in the market. The key is seeing a follow-through. So far this year, any slight dips have been bought. We will know soon enough if anything has changed. 

In the meantime, any company that is remotely related to AI crushed earnings estimates and went higher – mostly semiconductors and software. We have also seen so many positive earnings reactions across various industries – fast food, apparel, shoes, transportation, industrials, biotech, medical devices, advertising, crypto, etc. The midcap ETF, MDY broke out from a long base. The small-cap ETF, IWM has been volatile but also making higher lows above a rising 50dma and setting up for a potential breakout near 205. These are all bullish developments. There will always be something to worry about but that doesn’t mean that you should get bearish without any price evidence for it.  

The big question you should ask yourself is – are you losing the big picture just because you are preparing for a 3-5% seasonal pullback? People seem so afraid of missing out on the next correction that they might not be benefiting enough from the current rally. Of course, it’ll end at some point and we will have a correction but there’s no price evidence that one is currently underway. The one thing to keep in mind for the next week is that the second half of February tends to be seasonally weak, especially after monthly option expiration. Being nimble and more selective in the next couple of weeks would make sense. 

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MarketSurge powers the charts in this video.

The S&P 500 and the Nasdaq 100 closed at a new all-time high again. The mid-cap ETF, MDY is setting up for a potential breakout out of a long multi-week base. Small-cap stocks are also starting to wake up. And yet, there seems to be a solid dose of negative sentiment. I love skepticism during bull markets because every trend needs disbelievers.

People are citing bearish momentum divergences as the major reason. The number of S&P 500 stocks above their 200 and 50dma is decreasing while the index is making new highs. This is how indexes topped in the past. The trouble is that timing a top is a lot tougher than capturing a bottom because stocks top as individuals and bottom as a group. A bearish divergence can continue a lot longer than most expect and can resolve in two ways: We can see an expansion of the rally as more stocks participate. This happened last year in May and June. Or we can see a correction and most stocks pull back.

From where I stand, both scenarios are equally plausible right now. More stocks joining the rally mean more and better opportunities in faster-moving stocks. A correction means lower prices in the strongest companies – so many investors are dreaming about buying pullbacks in the strongest semiconductor and software stocks. Any dips will offer better risk-to-reward opportunities. 

What would make me bearish is an increase in distribution days.  Stocks falling on big volume for multiple days is a sign of distribution or institutional selling. We haven’t seen that yet. Stocks making lower highs and lower lows in the time frame of your interest – be it weekly, daily, or hourly is what would make me take on some short or buy put options. It’s as simple as that. Before those occurrences, bearish divergences don’t matter. They can continue a lot longer than most expect. As legendary investor, Peter Lynch said: “Far more money has been lost while preparing for a correction than during the corrections themselves”.

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I published a new trading book recently (2023). Check it out on Amazon.

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

MarketSmith powers the charts in this video.

Another new all-time high for the S&P 500 and the Nasdaq 100 despite of the Fed’s comments on interest rates. Powell said that they will very likely wait until May before they cut rates to make sure that high inflation won’t come back. The market initially sold off but quickly bounced and made new highs after strong earnings from Meta and Amazon. The economy is strong, the job market is strong, inflation is slowing down, companies’ earnings are beating estimates, there are 6 trillion dollars in money market funds, and it’s an election year, which means there will be more deficit spending. There are plenty of catalysts to fuel stocks higher. Nobody knows how high.

Granted, nothing goes straight up. Pullbacks and corrections are a normal part of every bull market. Seasonality is bearish between now and May and yet some parts of the market haven’t shown any traces of pausing. There are some bearish momentum divergences. Consumer staples are outperforming in the past few months which is typically defensive. Small and mid-caps stocks have significantly underperformed year-to-date. They are a much smaller part of the market than they used to be. The current market cap of all Russell 2000 companies is $2.5 Trillion. Just Microsoft alone has a market cap of 3.1 Trillion. Apple is at 2.9T. Google and Amazon are at 1.8T each. Nvidia is 1.6T. Meta is 1.2T. Each of these is big enough to be an index/ETF on its own.

Try my subscription service which includes a private Twitter feed with option and stock ideas, emails with concise market commentary, real-time market education, the Momentum 40 list of market leaders, and much more. See what subscribers say about my educational service.

Check out my free weekly email to get an idea of the content I share with members. How my ideas/alerts did.

I published a new trading book recently (2023). Check it out on Amazon.

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