Bulls Got a Green Light, But Here’s Why They Shouldn’t Floor It
We have a technical follow-through day, however, disciplined buying is paramount.
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The strong market action Tuesday qualified as a technical follow-through day using Investor’s Business Daily market methodology. IBD raised its recommended market exposure to 40% to 60% Tuesday, the second increase in two days, after the S&P 500 delivered the advance on volume that its system requires.
Last week IBD was recommending its lowest possible exposure of 0% to 20% even though the DJIA was moving up vigorously. The IBD system cannot raise exposure without specific evidence and no amount of good action in individual names substitutes for it. The evidence that IBD requires showed up Tuesday, but I have been watching the many pockets of good action in individual stocks as well and that has helped me maintain a higher level of exposure.
The start is quiet Wednesday with the Nasdaq lower and the S&P 500 (SPY) modestly higher.
A Green Light Is Not a Starting Gun
A technical follow-through day gives you permission to start buying, however, it does not give you permission to rush in and get fully invested immediately.
The standard approach is to buy a few fundamentally and technically sound names breaking out of bases, or look for alternate entries in stocks that already broke out and are consolidating. If the new buys make progress, you add. If they turn into quick losses, the signal was premature and you have lost very little finding that out.
There is a specific reason for caution with the timing here. The strongest follow-through days come after meaningful declines, and the S&P 500 only pulled back about 5% from its high. That does not invalidate the signal but it does increase the range of outcomes.
This could be a short-term tradable rally that quickly runs into distribution days, or it could be the start of something sustained. There are plenty of economic and fundamental issues out there that could trip up this market but for now the price action is positive and is giving a green light for a more bullish posture.
Do Not Chase Strength
Many stocks have gone straight up for two days. That is bullish, but it is exactly why you should not be rushing in. A stock that has run without a pullback offers you no support underneath, no level that tells you the trade is wrong, and the highest price anyone has ever paid for it. Buying there is not prudent, it is hope that emotions will stay elevated.
Palantir (PLTR) makes the point. It soared 29.5% Tuesday, finishing as the top percentage gainer in both the Nasdaq 100 and the S&P 500 after its quarterly results showed accelerating revenue growth. The stock gapped above its 200-day moving average. It is also still more than 20% below its all-time high after a sharp downtrend. PLTR is a stock with a strong story behind a big move, but it may not be a stock you want to rush in and buy on Wednesday morning.
If this is a sustainable uptrend, the buy points will develop. Stocks that gap and run almost always consolidate, and the consolidation is where the entry is. Traders need a technical level to work against and a reason to exit if the stock stops behaving. Waiting for that costs you a little upside and saves you from the losses that come from paying up into a vacuum.
SpaceX Is the Reminder
The capital spending question that has been the big story recently did not go away just because the market rallied for two days.
SpaceX (SPCX) reported after the close and delivered a 92% surge in quarterly revenue. The stock is down more than 10% premarket trading to around $110. The problem is that capital expenditures hit $18.4 billion in the second quarter alone against $2.8 billion in the same quarter last year. Spending is growing far faster than revenue, and that is the same thing that sank Meta Platforms (META) last week.
Elon Musk said the company will reach $1 trillion in revenue by 2030, a year earlier than previously forecast, against first-half revenue of $12.5 billion. Bernstein made the case ahead of the report that investors should focus on management’s confidence in the growth path rather than the near-term stock movement, and views the multi-trillion dollar valuation case for orbital data centers as a question of if rather than when.
There is also a supply problem. A batch of share unlocks is about to hit, and the stock has been a fixture on the new-low list for weeks. A close below $115 puts the recent lows near $108 back in play.
This big rally was due to some relief about the capex issue but SpaceX is a reminder that nothing has been settled. FOMO can carry momentum in the AI names a long way, but the underlying questions have not disappeared and may reappear at any time.
Game Plan
My approach does not change because the IBD exposure model went up. I am looking for buyable setups rather than chasing the names that already moved.
Small-cap earnings are arriving in volume on my screens and that is where my attention stays. Precigen (PGEN) reported a blowout quarter and I am trading it aggressively. Dozens more reports are coming over the next two weeks and the volatility and dispersion will produce entries the same way it did in the mega-caps.
The follow-through day improves the odds and it deserves respect. It does not eliminate the need for patience or the discipline of waiting for a level worth buying.
At the time of publication, Rev Shark was long PGEN.
