Ivanhoff Capital

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While the main stock indexes have been making new highs in December, the percentage of stocks trading above their 20-day moving average has decreased from 85% to 55%. This might be just the healthy reset or the beginning of a normal 10% pullback – they are a lot more frequently than most think. SPY has one in October and one in September of last year when the percentage of stocks trading above their 20-day moving average dropped to 15%.

Bull markets correct through sector rotation. We have seen so many examples. A significant number of momentum stocks are currently in a pullback mode. There is a reason so many breakouts have not been following through lately. In the meantime, the so-called recovery stocks and ETFs are shining – breaking out or setting up: 

The market is clearly betting on the COVID vaccines working and things getting back to some resemblance of normal. The markets constantly try to price events that haven’t happened yet. Sometimes, they are right and predict the future; sometimes; they are terribly wrong but the bank doesn’t care if you made your money riding trends that were not justified by fundamentals. 

Another big catalyst we need to be paying attention to right now is the next earnings season which starts in a couple of weeks. The period right before a new earnings season is typically bullish. We have already started seeing some of the mega-cap stocks like AMZN and NFLX to wake up from a 3-month slumber and have potentially started their pre-earnings rally. This is common among stocks that had big earnings surprises in the previous earnings season. Speculators are always trying to front-run another potential strong report and we often see 10-20% rallies ahead of the earnings releases.

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Don’t ignore industry relative strength. It is among if not the most powerful catalyst for short to medium-term moves in the stock market. Just take a look at the solar stocks in the past 4-5 months. So many of them tripled or even quintupled in the second half of 2020 and they continue to be hot and provide great swing trading opportunities on a monthly basis. It happened again in the past couple of weeks when many solar stocks bounced from their 20 or 50-day moving averages. Once an industry trend is established, it tends to persist for a long time. Look at other examples from this year – electric vehicles and parts, electric charging stations, fuel cells, lidar sensors for autonomous cars, online gambling and e-sports, gene editing, etc. It is not an accident that so many recent IPOs and SPACs have been in exactly those industries. When Wall Street smells a good story with unlimited demand, it makes sure to oversupply the market (feed the ducks). Eventually, it will matter and those trends will reverse but before that, some of those stocks can and have already gone up 5-10x. Our job as market participants is not to complain about the faults of the system but to find solutions – recognize trends and extract money from them.

Besides the hot action in clean energy and select biotechs, we are starting to see more signs of froth – SPACs sky-rocketing to absurd valuations without even knowing the company that they will merge with. Just 10-15 years ago, SPACs were looked down upon as a vehicle to bring public unremarkable private companies. Nowadays, they are the most popular way to get public.  We are also seeing quite a few stocks that doubled in 4-6 weeks, double again after a brief consolidation (the so-called high-tight flags which are supposed to be a rare bull market formation are showing up all over the place and more importantly, they are mostly delivering). In the meantime, there has been an increase in reversals after technical breakouts. All of these are signs of a typical topping behavior but I would not short this market. It’s just too strong. The more likely scenario is that this hubris and FOMO (fear of missing out) will be resolved via another set of sector rotations. We just need to be paying attention where. Homebuilders and building material stocks are starting to set up again. Silver and gold miners are beginning to perk up. Financials are setting up for a potential breakout. There are enough places to rotate to if the hot action in cleantech and biotech subsides for a bit. 

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


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Momentum stocks were on absolute fire last week and accelerated their ascent – software (FSLY, APPS,VRNS, MDB, WDAY,IGV, etc.), cybersecurity (HACK), anything cleantech (especially solar TAN and fuel cells like PLUG, BE, BLDP, FCEL), social distancing (PTON), e-commerce (CHWY, RVLV, ETSY, SHOP), e-sports and games (SKLZ, NGMS, PENN, CRSR, DKNG), online payments (SQ, PYPL, PAGS, STNE, ADYEY), real estate software (RDFN, Z, FTHM, EXPI, IPOB), select biotechs (TGTX, SGTX, BTAI, IONS, SAGE, RARE, ITCI), homebuilders (NAIL). Gold and silver also started to move as it became clear there is an agreement for a new stimulus. Bitcoin broke above 20k. Even some of the mega-cap like AMZN, AAPL, and MSFT woke up. The U.S. Dollar made new multi-year lows.

Many momentum stocks are looking extended for new entries here. I wouldn’t advise chasing stocks that are up multiple days in a row and 20-50% in the past 1-2 weeks. We certainly noticed an uptick in volatility last week – there were quite a few failed breakouts and reversals which means many people are anxious to take profits quickly. Capital is not leaving the market. It is just rotating very rapidly. There is still a good number of decent long setups and they might just continue to work into the end of the year. Until all major indexes’ 5-day EMAs are above their 20-day EMAs, we should be focused on long setups.

Try my new 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 50 list of market leaders, and much more. See some of the recent testimonials.

PERFORMANCE

Here’s a Google spreadsheet tracking all closed option 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.