Weekly Update: Striking the Balance
As of 11:30 AM ET on Friday, the S&P 500 is up about 1.7% for the week while the Nasdaq is up by 1.2%. Yesterday, they closed at new record highs.
The pullback I think is overdue doesn’t look like it’s going to happen within the next few days (although the market has a tendency to surprise you).
One big reason for that is undoubtedly Nvidia, whose fourth-quarter earnings release late Wednesday blew the already high expectations out of the water – sending its stock surging by 16% in a single day (and the stock gapped up today as well).
Nvidia’s blockbuster earnings lifted the sentiment of the entire market, delaying a pullback that had only just begun.
But make no mistake, I still firmly believe the market will enter a real pullback soon.
The divergence between market performance and market breadth I’ve been highlighting is still there.
Only 51% of stocks above their 50-day moving average, and only 59% of stocks are above their 200-day moving average. Those figures have fallen significantly since late December – and yet the major indexes are at new record highs.
For the rally to be sustainable, we’ll need to see much stronger participation than this.
The question is – when the pullback comes, how long and how painful will it be? That is something no one can predict (and if they tell you they can, they’re lying).
Same thing with when the pullback will actually hit – no one can tell.
But as famed trader Walter Deemer says, the most bullish thing the market can do is keep going up. And that may very well happen.
That’s why the theme of this update is Striking the Balance. What’s the balance between expecting a pullback – and participating in a rally that just won’t quit?
Before I answer that, let me get clear that I firmly believe that the coming pullback will be a healthy one (even if it probably won’t seem so when you’re in it).
Let’s quickly go over the reasons why.
First, the market mood is still very much “risk on”. And to gauge that, we can look at the performance of Bitcoin, one of the most speculative asset classes there is.
Second is the AI factor. Nvidia has shown that it’s much more than just hype – but something that’s being backed up by actual dollars. And we’re still in the early days.
Third is the coming Fed rate cuts. Yes, it’s true that many traders have overestimated how quickly these rate cuts are likely to occur – especially in light of the latest inflation data (in fact, this overestimation is one of the reasons the market will likely pull back soon).
And fourth is the fact that there is still over $6 trillion parked in money market funds – money sitting on the sidelines that can easily fuel the next big leg up.
So, coming back to the question of striking the balance between expecting a pullback and participating in the rally…
The important thing to remember here is that individual stocks – and even individual sectors – are not the market. The market is just a composite of them all.
Navigating this balance means going beyond the surface and searching for specific areas of strength – regardless of what the broader market is doing.
These areas of strength are where you’ll find the market leaders – the stocks that are likely to break out ahead of the market.
As for where to find these areas of strength, well, that’s one of the reasons I built our Industry Strength Gauge.
As you can see, crypto and digital payment companies are still leading the pack.
So that’s where I’ll be focusing a lot of my research in the coming weeks. I’ll be scanning for my trusted setups – looking for signs of institutional buying that signal high-percentage breakouts.
I’ll keep you informed. Have a good weekend ahead.
Best wishes for your trading,
Ross Givens