Weekly Update: The Major Market Indexes Move Together… Usually
Good evening, and welcome to this week’s edition of Stealth Trades!
In general, the major market indexes move together.
The Dow, S&P and Nasdaq all move higher in a bull market and lower in a bear market.
One might be up 10% for the year while another is up 11%, but for the most part, the difference will be minimal.
That was not the case this week…
As of Friday morning, the Nasdaq was up a whopping 7.3% for the week while the Dow was essentially flat.
This is rare.
The Dow Jones Industrial Average is comprised of traditional blue-chip stocks – Caterpillar, Chevron, Boeing, etc. These names, especially the industrial and energy companies, are showing weakness.
The Nasdaq index, on the other hand, is made up of high-growth tech stocks like Microsoft, Apple, Nvidia, and Broadcom.
Unlike the Dow stocks, many of the Nasdaq names are at or making new highs.
This contrast in performance shows a tug of war taking place in the stock market and leads me to believe that a strong move is about to occur.
But in which direction?
I tend to have a pretty firm bias for which direction I believe the market will go over the coming week. But right now, it’s a coin toss at best.
The bull case goes something like this…
We have already seen inflation peak, and the numbers are trending down. The bank crisis was essentially solved when the treasury stepped in to insure depositors above the FDIC limits, and jobs numbers came in better than expected. So even with record inflation and skyrocketing interest rates, the economy has shown a lot of strength.
The bear case comes down to price action…
The S&P 500 has been trending lower for six weeks and is flirting with breaking back below its bear market trendline (dashed line on chart).
Another hint we might be heading lower?
Gold.
The price of gold is soaring. It is up 8% in the last week and a half and moving higher.
The commodity saw its highest volume up day in over a year last Friday. On Monday, it had an even bigger one. These are the purple volume bars on the chart below:
(Note: My custom volume indicator is free on TradingView. To add it to your charts, click ‘Indicators’ at the top and search for “Ross Givens Volume”)
Historically, gold is a flight-to-safety trade. Investors tend to buy in uncertain times as a hedge against equities.
It is now within spitting distance of its 52-week highs. So, this could be a warning sign of what’s to come.
If you are more confused now than when you started reading this, I apologize. That was not my intention.
My goal is to prepare you for whichever scenario plays out.
To do that, I like to keep a LONG watchlist of the strongest stocks near buyable pivots and a SHORT watchlist containing the weakest names.
The short watchlist stocks will trigger first if the market rolls over and the long ones will trigger if the indexes push higher.
This week I am sharing 4 trade ideas – 2 longs and 2 shorts.
LONG TRADE IDEAS
Palo Alto Networks (PANW)
PANW is a true honey badger. It does not seem to care whether general market is going up or down.
The stock jumped 40% to start the year and has taken only a small pause at the highs to digest this big advance.
When the market pulls back like it did in February, you want to look for the stocks like PANW that are resisting the decline.
PANW actually went up last month and has held at its highs even through the banking crisis that took place over the last week and a half.
If this stock can break out to new highs, it could be worth taking a long position.
Samsara (IOT)
Samsara completely bucked the trend last month.
It advanced beautifully and then gapped higher after reporting big sales growth in early March.
The recent pullback has been minimal, and in my opinion, is simply a pullback into its longer-term uptrend (see chart below).
My trigger for this one is 20.25. But I would like to see the stock base here for a few more days and digest the rest of the sellers.
That followed by a breakout above 20.25 would be my signal to hop into IOT and ride the uptrend.
SHORT TRADE IDEAS
CareDX (CDNA)
Earlier this month, CDNA got absolutely crushed.
The stock fell 32% in a single session after a Medicare policy change appeared to indicate it would no longer cover services for the organ transplant test maker.
The selloff was the sharpest intraday loss for CDNA since 2015 and occurred on 12 times its average daily volume.
The market has had two weeks to sort out the news and determine if the news is as bad as originally perceived.
It appears that it was.
The stock has been unable to rally and is now flirting with making a new 5-year low.
If CDNA breaks below $9.00, I would consider selling it short with a buy stop at $10.00.
Pfizer (PFE)
America’s favorite drug dealer has been steadily declining since the start of the year.
The stock is down 24% for 2023 while the indexes are positive. This represents significant underperformance as shown by the steadily declining relative strength line at the top of the chart.
PFE now trades below declining 21, 50, and 200-day moving averages which is extremely bearish. If the general market flushes lower, this one is going to really fall apart.
The decline in Pfizer stock has been a long time coming. The global pandemic that took and ruined millions of lives has been a profit windfall for the company.
The image below shows the boost in revenue from COVID vaccines.
The effectiveness of these vaccines is fiercely debated. But their profitability is undeniable.
But COVID won’t be here forever. And the company’s record sales growth has come to a screeching halt.
The key level I am watching is $41. This was the last line of support in 2022 and is quickly turning into resistance for PFE stock.
It also coincides with the 21-day moving average which is likely to contain any short-term bounce higher.
Consider taking a short position in PFE in the $40-$41 range. I don’t think one needs to risk more than about 4% on the trade. A buy stop at $43 should be adequate if the downtrend is to continue.
Best wishes for your trading,
Ross Givens