Weekly Update: Rally Extended
Good evening, and welcome to this week’s edition of Stealth Trades!
What a week.
The Nasdaq index surged another 5% to extend this rally even further.
This week’s Fed meeting saw rates unchanged as we expected. Wall Street has been expecting a pause to the rapid interest rate hikes and we finally got it.
But with a caveat…
Powell said they expected to raise rates twice more before the end of the year.
Hopefully that is not the case. Let’s remember that Powell and his cronies at the Fed are the ones who created this fiasco in the first place.
Their reckless money printing during the COVID crisis is what caused inflation in the first place. They “inflated” the money supply. That’s just how it works. It is not supply chain issues or corporate greed or whatever new fairy tale they are trying to sell the American people.
The Fed caused record inflation. They are embarrassed. And now they face the impossible task of controlling it without crashing the economy.
Wednesday’s comments may have been a bluff – one final attempt to spook the market and curb inflation before bringing rates back down to Earth.
Only time will tell.
But in the meantime, the stock market looks extended…
Even when markets are in uptrends, they don’t go straight up. Large advances must be digested along the way.
If prices go up too much too fast, they usually pull back temporarily.
A quick way to see if a market is extended is to measure its distance from the 50-day moving average (red line on chart).
Above is a weekly chart of the Nasdaq index.
Notice how the 50-day line contains the move in both bull and bear markets. When the index strays too far above or below, price pulls back as it reverts to its mean.
Below is a closer look at what happens when the market gets extended.
For the Nasdaq, it tends to pull back when it gets more than 12% above its 50-day moving average.
And that’s where it is trading today.
The market is overbought.
And while it is possible to stay that way and continue higher, the more likely scenario is that we will see a 5-10% pullback in the indexes.
If this happens, I will be using it as a chance to buy top-performing stocks on pullbacks.
AI is the dominant theme of the market right now.
NVIDIA (NVDA) makes the go-to chip for artificial intelligence applications. Its stock is up more than 200% this year.
C3.ai (AI) is the owner of ChatGPT – the AI language model that has already garnered 100 million users. That stock is up over 300% this year.
Palantir (PLTR) has one of the only commercial AI software applications. That stock has doubled since May.
All of these are on my shopping list as potential pullback buys.
Here are a few more stocks on my radar:
SoundHound (SOUN)
I’ve had my eye on this stock for months.
SoundHound is smaller, off-the-radar AI stock. The company owns several patents involving voice-recognition technology.
If you drive a Dodge, Chrysler, Jeep, Hyundai, Kia, Honda or Mercedes-Benz, you are probably using their software already.
HOUN ripped higher to start the year, but it got overcooked and settled back in the $3 range.
It has been forming a base for the last four months with resistance near $3.35, and the stock is now trying to breakout higher.
I just bought a few thousand shares on Friday with plans to add on as it advances.
iShares Robotics & AI ETF (IRBO)
Another way to play the AI trend is to make a bet on the entire sector.
The easiest way to do this is with an exchange traded fund, or ETF. ETFs trade just like regular stocks. But each share represents fractional ownership in a basket of stocks.
IRBO owns 133 stocks with exposure to robotics and artificial intelligence.
For me, this is a longer-term trade I would like to hold for several months which is why I bought it in my IRA account.
You can see the first Stage 2 breakout in the weekly chart above. The ideal buy point would have been closer to $32, but I believe it is still buyable here. I will hold IRBO as long as it holds above $28.
Progyny (PGNY)
This stock has nothing to do with artificial intelligence. It is a fertility company. But the growth is tremendous.
PGNY sales have increased by more than 50% in each of the last four quarters, and 2023 earnings are projected to be nearly triple the best year they’ve ever had.
With a 2024 EPS estimate of $2.05, the stock trades at just 19X forward earnings which is a steal for a high growth name like this.
The dashed line on the chart above shows a key support/resistance level in PGNY.
The recent pullback gives trades a chance to buy near this level with the 21-day moving average (blue line) offering additional support.
I would consider buying here with a stop at 36.50 to risk less than 6% on the trade.
Best wishes for your trading,
Ross Givens