Weekly Update: The Market Pullback is a Good Thing
Good evening, and welcome to this week’s edition of Stealth Trades!
The market pulled back in the first trading week of the year.
That is a good thing.
We all love when stocks go up. But if they go straight up for too long, it is only a matter of time before prices correct harshly.
Stocks went up in 8 of the last 9 weeks. That is almost unheard of. The market needs time to digest this rally, absorb the sellers, and set up for the next move higher.
The best gains come from clean breakouts out of shallowing compression patterns. This is my go-to chart pattern when looking for institutional buying.
Here was the Russell 2000 index breaking out in December:
This led to huge gains for those who were holding the right stocks in the right sectors.
The process for finding high returns is simple:
- 1. Strong market
- 2. Strong group
- 3. Strong stock
At the start of December, crypto and home construction were the strongest areas of the market. The ETFs representing these groups (BLOK for crypto and ITB for home builders) were up more than their peers.
So this is where we focused our efforts.
That’s how we knew to buy Mohawk Industries (MHK) – a residential flooring company that was breaking out around the same time:
We bought Dream Finders Homes (DFH), a residential home builder, at the same time:
In the crypto sector, we bought Bit Digital (BTBT):
…and Marathon Holdings (MARA):
My process does not change. When the market gives a buy signal, we get aggressive. The top stocks in the top groups are your best bets.
When the market is weak or extended, we trade smaller – still focusing on leading stocks in the top-performing groups.
Below is a summary of the top 5 performing groups over the last 1, 2 and 3 months:
Home builders, biotech and banking are currently leading the way with shipping beginning to emerge as a strong performer.
Star Bulk Carriers (SBLK), for example, is beginning to look strong on a weekly chart:
If shipping stocks are being accumulated by institutions, we will see this group continue to outperform and find similar setups in multiple stocks in the sector.
Many groups, like banking for example, are currently extended. We need to see prices consolidate and tighten up before they are ripe for new buys.
We are only one week into 2024. If the bull market we see shaping up plays out as expected, there will be plenty of opportunities to profit this year.
Stay patient. Focus on strength. And demand picture perfect setups before pulling the trigger.
Best wishes for your trading,
