As the Market Celebration Slows, the Hard Work for Investors Begins
The market's move following Donald Trump's win has been the largest post-election rally in history. According to Ned Davis Research, the S&P 500 (SPY) Russell 2000 (IWM) , Financials (XLF) , Energy (XLE) , and several other sectors realized their biggest one-day post-election gains ever and, in all cases, continued higher in the following days.
After this rampage, however, there are some signs that the strong momentum is starting to slow. Bitcoin (IBIT) and Bitcoin-related names are still running but are giving back some overnight gains early on Tuesday morning. Small-caps have been running very hot as well, but they are also seeing mild profit-taking in the premarket.
Obviously, after moves of this magnitude, many stocks are technically extended and need a rest. The big question is how to deal with it. Longer-term investors who believe that a new uptrend has started may want to hold tight and try to withstand a bout of elevated volatility. Those with a short-term time horizon may want to take some profits and try to find new entries at lower prices after the charts find some support.
As is typical, the bears are predicting that this rally is completely unjustified and that there will be a market collapse. While that is possible, it is very unlikely as the mood of the market has shifted substantially. Those who missed out or underperformed during this rally will want to try to catch up by buying dips and pullbacks. The vast majority of investors don't try to make up for underperformance by shorting. They try to make it up by buying better stocks.
At this point, the key to producing outperformance is to focus on the rotational action. There has been a notable move out of the Magnificent Seven (MAGS) names and into the Russell 2000. There are two reasons for this — smaller stocks are very undervalued compared to the S&P 500, and the charts of many smaller stocks are not as extended. Smaller stocks have gone up so big and so fast that it is now more challenging to find good entries, but that will change with a few days of consolidation.
I did a fair amount of selling on Monday and raised my cash levels, but I'm still trying to ride momentum in the Bitcoin sector and in a number of other names. While I believe that there is a good chance of an uptrend through the end of the year, we will likely be hit by a bout of elevated volatility that will scare out some bulls and increase skepticism. Currently, the market mood is too bullish, and there aren't a lot of buyers left to chase the strength.
We have some weakness in starting the day on Tuesday, and we will see how anxious the dip buyers are to buy mild pullbacks.
At the time of publication, Rev Shark had no positions in any securities mnetioned.