Ivanhoff Capital

Some of the major themes that are currently defining the price action in the U.S. stock market:

1. Asset inflation and the U.S. Dollar. It is simple, if the U.S. Dollar continues to lose ground, people will attempt to protect of purchasing power of their capital and the price of many assets is likely to go up – stocks, real estate, crypto, precious metals.
2. So many breakdowns in software stocks after they reported earnings illustrating that the COVID-related restrictions and spending cuts are not favorable for all tech stocks. This has been an ongoing theme for a second week in a row.
3. Small caps finally woke up. I don’t know if it is because of the expectations of another stimulus, a working vaccine, or just catching up with the rest of the market. A potential rotation into small-caps will only prolong the current rally in stocks.
4. More strength in solar. Every single earnings report in solar has led to a gap and go this quarter. None of those reports showed spectacular growth. The market is forward-looking and buying in anticipation of a major new clean energy bill.
5. The dips in mega-cap tech stocks like AAPL, FB, AMZN, and GOOGL are still scooped up. Obviously, no company is completely invincible and politicians like to attack the big and successful.
6. We saw some epic melt-ups in highly shorted stocks – CVNA, W, OSTK, CELH, etc.. While fun while they last, typically those tend to happen towards the end of a bullish cycle. They are not the perfect timing indicator but it is something to be aware of.

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So far this earnings season has confirmed what the market has long suspected and priced – Big Tech, e-commerce, network infrastructure, social media, and 5G stocks are thriving in the new COVID world. Now, the big question is, how many of those stellar earnings gaps in stocks that have already run 50% in the past few months are “sell the news” events and how many will just keep going higher? My suspicion is that we will get a little bit of both. Some of the gaps in popular stocks will be initially faded (see SHOP and AMZN after their best earnings ever) but the pullbacks in those same names to their 20 and 50-day moving averages will continue to get bought. Some of the old leaders will continue to lead (FB, AAPL). There will be quite a few new leaders emerging out of this earnings season.

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The charts in this video are powered by MarketSmith

The earnings season is heating up and there are several hundred major companies reporting this week. Some of them – AMZN, AAPL, FB, GOOGL, SHOP, SPOT, UPS. Given the weightings of the first four, their earnings reports will be market-moving events. For the most part, I expect any gaps to be faded in them – if they gap up, we might see a temporary sell the news events as expectations are highs given the moves in the past 2-3 months. If they gap down, the downside will probably be limited to their 50-day moving averages as the market still believes that the dips are buying opportunities because of the Fed’s open market purchases. 

The rotation into sectors that would benefit from the “re-opening” of the economy hasn’t happened yet. There have been the occasional spikes but for the most part, no follow-throughs. Restaurant stocks shined on Friday in red tape. Let’s see if they can continue higher next week.

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