Ivanhoff Capital

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Financial markets shoot first and ask questions later. It’s in their nature. They constantly strive to be forward-looking and don’t waste time discounting any potential threat or an opportunity; often they get way too excited or way too fearful and overshoot. Here are the four narratives ranked in terms of current impact on price action:

1. COVID – the recent rise in new Covid cases around the world has become the major theme in the market. The so-called reopening plays have been in a downfall for several weeks now. Vaccine makers (MRNA, BNTX), big tech (AMZN, AAPL, GOOGL, MSFT, FB, etc.), Covid test stocks (QDEL, TMO, HOLX), have been showing notable relative strength. Even the VIX is starting to perk up.
2. Stimulus and infrastructure bills – everyone knows that the government is one scary Covid headline away from announcing another set of stimulus. This is why we haven’t really seen any significant pullback in the major indexes. Yes, market breadth has been weakening and many breakouts have not been recently following through but the dip buyers are waiting impatiently around the corner. This doesn’t mean you should be complacent and not take your losses if you are not hedged. It’s just a reminder that it’s probably not a good idea to turn overly bearish and think that stocks are about to crash. A 5-10% pullback is more likely to create a buying opportunity.
3. Inflation – The Fed keeps saying it’s transitory and yet, every time there’s an inflation report, it comes way above expectations. Inflation fears may not matter now too much but make no mistake, the second the market sniffs out that Covid is leaving, it’ll become front page news again and we might see another rotation – selling software and buying basic materials. We are not there now. 
4. Earnings – the latest earnings season has just begun. All major banks crushed estimates and yet their stocks went lower. There’s no better indicator of sentiment than the market reaction to earnings results. The mood hasn’t been very enthusiastic so far. Let see Big Tech reports will change the current cautious perceptions. 

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Bull markets correct through sector rotation. Earlier last week, we saw large-cap stocks (especially tech) perking up alongside the U.S. Treasuries while most of the rest of the market was under pressure. Supposedly, the market was/is worried about the various Covid mutations. 

Some of those fears are justified. Parts of the world that don’t have sufficient access to vaccines have already entered full lockdowns and there’s still a large number of people in the U.S. and Europe who don’t want to get vaccinated. We know that vaccines work and are the fastest way to stop the spreading of the virus so it’s just a matter of time needed for the manufacturing and distribution of doses, smart marketing, and proper incentives to solve the problem. In the meantime, the stock market might remain choppy and very reactive to any news on the subject as we saw last week – first with the announcement of no viewers in the Olympics in Japan which led to a market selloff, and then with the CDC latest guidelines suggesting that vaccinated school kids don’t need to wear masks indoor which led to a bounce on Friday.

In the meantime, dips continue to get bought but breakouts have not been following through as of late which is a clear sign of a range-bound market. This is a typical price action for the beginning of a new earnings season which starts next week with financials reporting. It’s normal for the indexes to chop around while digesting new information. The good news is that every earnings season gives birth to at least several new powerful trends and I doubt this one will be an exception so we will be watching closely.

In terms of setups ready to go, quite a few software stocks have formed a cup-with-handle pattern and are setting up for a potential breakout. Keep in mind that If interest rates spike again, those breakouts are likely to fail. If you play them, be sure to be nimble: ZS, CRWD, FIVN, TEAM, HUBS, SHOP, TWLO, OKTA, 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.

The charts in this video are powered by MarketSmith

One can make the argument that we saw a flight to quality last week. Many of the high-momentum flyers started to break down while capital rotated into large caps. This is not just an inflation story. Capital didn’t go only to tech because of falling interest rates last week. We also saw stocks like Nike and Starbucks pushing higher. 

Mega-cap tech stocks have been running in the 2-4 weeks leading to their earnings reports in the past couple of quarters. It seems we are seeing it again. AAPL, GOOGL, FB, MSFT have been pushing higher. AMZN, NFLX, CRM, and TSLA are also setting up.

I don’t know if the current run into tech will continue. The market might as well decide inflation is a threat again and hit those stocks. But what will happen if this scenario plays out? Money will just rotate into financials and basic materials, which will prop up the S&P 500. Maybe, this is why SPY was up or flat every single day for the past two weeks and every 4-5% dip has relentlessly been bought this year. 

In the meantime, the small-cap ETF – Russell 2000, continues to build a humongous base. It has also been making higher lows since May. If it ever breaks above 234-235, it is likely to have a significant run.

Last week was big for gene editing stocks. NTLA doubled in 5 days. EDIT, BEAM, CRSP, FATE also had big breakouts and are now setting up for potential continuation.

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.