Watch for Trends to Switch Quickly This Year
The Market
One week ago, I said I think this year is going to bring us more volatility, not less, and so far the only day we really saw the CBOE Volatility Index rise was Wednesday. I still believe there is more to come. But more than that, I really do think this year will be the year that trends switch quickly. So a theme that may work in the first month or two of the year isn’t the same one that works in months six and seven.
After all, last year was about the majority of stocks heading down in the second half while the indexes levitated. We’re only a week into this year, but since November, the indexes have done a lot of treading water while individual stocks have moved plenty.
Growth stocks are currently out of favor. Value stocks are in favor. Value stocks seemingly have very little effect on the indexes. Energy and financials have soared and even the iShares Russell 2000 Index doesn’t care. Near the end of this week, the banks begin reporting their earnings. I wondered if we saw the banks rally into earnings, was there something we could garner from what the reaction might be. Last January (red arrow), they peaked and quickly dropped 10% before making a low and rallying again. In April, the drop was more like a few percentage points before returning to the upside. In July, they were already down and out. I have put the arrow at the low, but the reality is that the Bank Index was at 125 and fell to 116 on earnings, but similar to April they rallied thereafter. October was a short-term dip and another rally.
My conclusion is they are likely short-term overbought as they head into earnings but not dire. There is an unfulfilled target around 150-ish on the Bank Index. So I would stick with what I said midweek last week: I would do some selling in advance, but I’m not ready to give up on them because a dip should lead to another rally.
As far as Nasdaq goes, it sits right at that same support area we discussed last week (call it 14,800-15,000). I would not call Friday a serious break. But I did do some ‘what- ifs’ on the Nasdaq Momentum Indicator and I walked Nasdaq down 100 points a day for the next week or so and on Friday of this week, it turns up in a decent fashion. That’s the definition of oversold.
As a reminder, it doesn’t mean it must come all the way down there, nor does it mean it must happen on that date. Rather it is a heads up that if we do get a whoosh in Nasdaq this week, especially if there are fewer stocks making new lows (as there were on Friday), then there is a good chance we get a decent oversold rally in growth.
I would note that the Energy Select Sector SPDR is now up against some resistance. There is a measured target in the low 60s as well. This group is over extended and needs a breather.
Finally, let me note that unlike December ,the intermediate term indicators are not getting oversold and sentiment is not universally bearish. This is not a market to relax in.
New Ideas
Walmart (WMT) looks like a flag to me which ought to be bearish yet I think if it can get itself up and over that $146-ish area it ought to run toward the blue line ($150-ish).
If you are looking to play a Nasdaq rally, then I still think Facebook/Meta Platforms (FB:Nasdaq) is a good way to play it. But let me state that while I do not like the chart of Microsoft (MSFT:Nasdaq) it is closing at gap at $310 and has support in the $308-$310 area and it would qualify as an oversold stock should we get a whoosh. It would be a trade only though.
Today’s Indicator
The new lows actually contracted on Friday, both on the New York Stock Exchange and Nasdaq. The 10-day moving average, however, is still heading higher. Call it mixed.
Q&A/Reader’s Feedback
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I was asked to update my view on the VanEck Semiconductor ETF (SMH) to be long the semis. I still think it is in the process of forming a top. That would require a break of $290 to get the process rolling though so for now support is at $290 and likely it gets oversold down there. I expect in the next few months this will break $290 and make a try for $270.
I do not like the chart of Nividia (NVDA:Nasdaq) as it looks toppy to me. However, the channel (around $260) and the uptrend line that comes in around $240-$245 probably provide a short term area of support and therefore a bounce zone. If it does get down there and then bounces, I’d sell a rally to the upper line.
I was asked for a target on Bristol Myers (BMY) which I haven’t written about in ages because it seems to be doing just fine now that it got going! It has some resistance in this $63 area, but my target remains the mid to upper $60s, where it broke down from.
