Well, the markets are grinding their way through hump day with some volatility despite the CPI report delivering some good news ahead of the market open. This has some traders asking “Why?” – but we already know one of the main reasons…
This market lacks confidence and remains risk averse…
Sure, the Nasdaq 100 and a few other sectors are hitting some relative highs.
But in between the lines, we’re seeing a few of the sectors that matter more from the “risk-on” perspective lag the averages, which tells you investors are just chasing gains for the moment. Beyond that, they remain ready to flee stocks and head back to the sidelines.
Of course, the sector (or area) of the market that I have been keeping one eye on at all times is the Russell 2000 Index. This is the most important group of stocks to watch when it comes to gauging where the market is headed over the next 4-to-6 weeks.
The funny thing is that most investors are unaware of what the Russell 2000 holds.
EVERYONE knows the top 10 companies in the Nasdaq 100 (QQQ). You know, Microsoft Corp (MSFT), NVIDIA Corporation (NVDA), Apple Inc (AAPL), etc.…
But I ask you, do you know the top 10 companies in the IWM?
That’s what I thought. You’re far from alone.
For the record, here they are…
Let’s take a quick look at a few of the companies that are high on my radar from this list. But first, I want to give you the technical lay of the land for the Russell 2000.
Long-Term Trend: Bearish. The iShares Russell 2000 ETF (IWM) is currently trading in a bear market trend, as it is well below its 20-month moving average, which currently sits just below $200. From a long-term technical perspective, the IWM is targeting a move to $150, which is about 14% lower than the current price.
Intermediate-Term Trend: Bearish. IWM shares are also trading below their 50-day moving average (MA50), which is in a bearish trend as its trends lower. This suggests the index has a 67% chance of posting a daily close that is lower than the previous day. The intermediate-term target for the IWM is $165, about 5% lower than the current price.
Now, given the bearish nature of the IWM, I’m still looking for bearish trades in this corner of the market, as it is target rich with stocks breaking through key technical support levels and trends. That said, there are also a few bullish stocks in the top-ten holdings of the IWM that I want to bring your attention to.
Shockwave Medical Inc (SWAV)
Shares of SWAV are attractive from all technical aspects. The stock is trading well into a long-term bullish trend, as it is above its 20-month moving average as well as making its way to post new all-time highs. That’s right, I said NEW ALL-TIME HIGHS. This is a feat in a widely mixed-to-bearish market, so the stocks that are hitting these marks are attracting a crowd.
From an intermediate-term technical perspective, SWAV is also above its MA50, which is in a bullish trend. Additionally, the stock is preparing to see a Golden Cross pattern form, as its MA50 is preparing to cross above the 200-day moving average (MA200). This momentum will help punch the stock into that new high territory that I mentioned.
We’re working off some overbought froth from the shares, but that elevated RSI should drop considerably as the stock consolidates just below $300. While the stock is consolidating, the Bollinger Bands are contracting, which means this ticker will soon have the potential for a volatility surge to the upside.
The current reading of my Bollinger Band Spread Indicator is around 50% — and declining quickly. The last time this reading slipped below 10% was in early March, ahead of a 100% rally in the stock (no, that’s not a typo).
I’m buying some time to get into that by looking at the July $300 calls to give this volatility breakout time to develop.
Texas Roadhouse Inc. (TXRI)
On the bearish side of the tally is Texas Roadhouse. If you’re not familiar with the company, they operate a chain of casual-dining restaurants bearing their name.
From a fundamental perspective, TXRH (and other casual dining companies) are coming off of a year that saw inflation actually favor their business model. How is that possible? You need to look no further than last month’s CPI report for the answer…
Last year, we saw food prices at grocery stores go through the roof, as inflation hit Main Street’s kitchen. At the same time, we saw the restaurant industry hesitate to raise prices too quickly for a number of reasons.
A friend of mine who owns a few restaurants told me one reason this happened was that they find it hard to reprint menus as quickly as prices increase. But another reason is that it tips diners off to the fact that their check at the end of the meal is going to be higher, which quickly slows traffic to the restaurant. Larger chains are the same.
Back to my CPI point. The trend in the “Food Away From Home” inflation is heating up, while the “Food at Home” inflation is cooling. Here’s the data from the most recent CPI report.
Long story short, consumers are starting to slow spending as they prepare for a recession. At the same time, the cost of eating at home is becoming extremely favorable. This adds up to a fundamental headwind for restaurants like TXRH.
From a technical perspective, TXRH shares are facing a technical challenge.
As you can see, the stock just broke below its MA50, while its faster-moving 20-day is starting an initial decline. That combination suggests that selling pressure is likely to increase on TXRH shares.
For now, traders should target a test of the 200-day moving average as a short-term bearish trade. The stock hasn’t seen its 200-day since September 2022,
May 10 2023