I Don’t Trust This Rally at All – Here’s Why
With the bullish action in the market, that little voice in our heads is getting louder… “Go out and buy anything. This is a throw-a-dart-at-the-wall moment – anything’s going to win,” it whispers.
People are giving in to that emotional inner monologue – mostly because they’ve got a serious fear of missing out. A bad case of FOMO fever, if you will.
But they’re not going to be happy in the long run.
I like to watch stocks rally as much as the next guy. It’s fun. But the thing is, the data is telling an entirely different story.
There’s one chart, in particular, I’m looking at that’s telling me all I need to know about how fragile this rally really is.
This is the number of companies, as a percentage, on the S&P 500 trading above their 50-day moving average (MA50).
This chart still matters – a lot.
For me, it is the true read on momentum in the market. It tells me how many companies are moving above that key – absolutely key – trendline.
The more companies trading above the MA50, the better the market breadth – or positive momentum – is.
As you can see, that’s going up and down so much it looks like an EKG reading.
In just the past month, we’ve gone from 55 to 45 to 75 to 50 to 75 (You dizzy? Yeah, me too). And if you look closely, you’ll see that, as of this morning, we’re trending back down.
So, right now, while it feels like this is a market where you’ve got to get in and buy, buy, buy, the technicals are still telling us to slow our roll.
You might remember, I actually wrote about this same chart back in December.
The rally we were experiencing at the time was happening without the help of hotshot companies like Apple Inc. (AAPL), Tesla Inc. (TSLA), Alphabet Inc. (GOOGL), or Amazon.com Inc. (AMZN), which were all trading below their 200-day moving averages (MA200).
(Oh, by the way, in that same piece, I specifically pinpointed February as the time I expected a bullish rally. Would you look at that.)
You need to keep your eye on this chart in the coming days. If we start to break down again into the 60s, it’s telling you that we’re looking at a questionable technical situation.
As more stocks start to fall below their MA50, we’ll start to see capitulation in the market paired with selling pressure.
That said, if we drop below 60, you’re going to want to keep your calls close to you, and keep the money for the puts on the ready.
But, on the flip side, if we see it jump above 80, the QQQ is going to be up at the $330 level –another 5-10% up from its current standing.
So, those mega-caps I mentioned back in December are still very relevant today, which should come as no surprise.
But the thing about Apple, Amazon, and Google right now is when this rally started, we hadn’t even seen their earnings. Meanwhile, they are all trading above their MA200s.
That means, once again, this current rally has started without their help – but this time, having broken their points of resistance, they’re cleared for takeoff.
This could send this rally going even higher – but you’re going to really need to be careful and be ready to pull out because it isn’t going to last forever.
Week 9 is something we’ve talked about a good bit. Well, it’s nearly upon us.
For those who don’t know what I’m talking about, here is the seasonality chart of the S&P 500’s performance by the week of the year. These are the averages from the past 20 years, so we aren’t dealing with some measly sample size.
That giant red candlestick on the left? That’s Week 9 – the worst of the entire year. It starts on February 27.
We might be in store for a fun little rally, but I anticipate all that comes crashing down when we hit that date.
So you’re going to want to be sitting close to your computers if you’re planning on trading this. There will be some money to be made for sure, but those who aren’t quick enough to get out will be left holding the bag.
Don’t let that be you.
This is going to be critical moving forward, and we’re going to watch it closely. Tomorrow morning, I’m going to break down exactly how to maneuver the impending Week 9 mayhem to make sure you’re better than protected.
There are going to be some trade opportunities.
Talk to you tomorrow.
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February 02 2023
