Weekly Update: This is How Things Have Played Out
Good evening, and welcome to this week’s edition of Stealth Trades!
Three weeks ago, in the October 13 Weekly Update email, I included this chart outlining my forecast for the final stage of the market pullback:
I discussed the final flush we were expecting to see that would set up an ideal buy point in the market.
This is how things have played out…
Hopefully you followed our advice, which we reiterated in last week’s email, and bought stocks this week.
If you did, there is a good chance you had a profitable few days.
The S&P 500 rose 5.91% this week – its best week in over a year. The Nasdaq did even better, tacking on 6.53%.
This move caught a lot of traders by surprise. After breaking support at 420 on the SPY (dashed line on chart above), many bulls threw in the towel and gave up hope for a bounce.
But as I discuss regularly, this is precisely when reversals happen.
Bear markets don’t end when the outlook finally turns rosy. If you wait until it is obvious that conditions have improved, you will miss the bulk of the move. Selloffs end when people quit selling… when the last stubborn bull throws in the towel and sells his positions.
This moment of “peak bearishness” is where savvy traders look to buy.
The FOMC met on Wednesday before announcing another rate pause. Stocks rose on the news and the major indexes gapped up then traded higher in the following two days as well.
Fed Chairman Jerome Powell’s language was interpreted to mean that rate hikes are over. The Fed has been looking for signs that growth is slowing, and inflation is coming down to signal that higher interest rates are doing their job to slow growth and tamp inflation.
This week they got it…
It is crazy to think that BAD news for the economy would be GOOD for the stock market, but that is exactly the situation we are in right now.
Higher unemployment is bad. Higher interest rates are worse. Wall Street wants rates lower. And the only hope of that happening is economic pressure.
Last week was our moment of peak bearishness – war breaking out in the Middle East, 23-year high interest rates, record low mortgage applications, slowing housing starts, an uptick in unemployment, and a rapid increase in national debt.
Things looked terrible. But unless they get worse, last week will be the low and stocks should continue to rise from here.
Market internals showed significant improvement over the last five trading days. Below are three key metrics I watch:
The put/call ratio on the left fell dramatically, signaling a shift in sentiment among speculators.
The percentage of stocks above their 50-day moving average in the middle rose from 16% to 36% this week. That means a fifth of the market transitioned into short-term uptrends.
The percentage of stocks above their 200-day moving average on the right also rose from 24% to 32%.
This is exactly what we want to see – a rally with broad participation and a large number of stocks reversing course.
The net new lows also turned positive:
The chart above shows a red number for Friday only because the data had not yet updated at the time of this writing. But more stocks made new highs than new lows on Friday.
Finally, the equal-weighted S&P 500 index (RSP) showed impressive performance this week as well.
For most of 2023, the rally has been led by a small handful of mega-cap names. Apple, Nvidia, Google, Meta, Microsoft, Amazon, and Tesla carry significantly more weight in the major indexes and often hide lackluster performance in the rest of the market.
This week, however, the equal-weighted RSP was up slightly more than the market-cap weighted SPY.
We continue to focus our efforts on the groups and sectors showing the greatest strength. The table below shows the top 5 over the last 1, 3 and 6-month periods.
Natural gas stocks as well as nuclear and uranium names have been clear standouts over the last couple quarters.
This month, crypto is making a move on the back of a wave of new Bitcoin ETF approvals by the SEC who previously rejected them across the board. More and easier access to crypto in IRA and 401k accounts could bring additional demand and trigger the next bull run in Bitcoin.
Defense stocks are moving for obvious reasons as well, but that trend could continue if these wars escalate further.
If you missed this week’s rally, don’t worry. If things play out as I expect, this is just the beginning of a new bull market. Wait for clean setups in strong stocks from the best-performing groups.
And if this rally continues, expect to see breakouts capable of big fast gains.
Best wishes for your trading,
