The Cure for the Summertime Blues: Small is Beautiful Again! And Zweig’s Sacred Rules.

It's a sector rotation until proven otherwise.

If you’re looking for a cure for the summertime blues look no further than the stock market, which delivered a hefty dose of portfolio medicine last week in the wake of better than expected inflation numbers.

The big winners were the small stocks.  But don’t give up on tech.  Just give the big stocks some time to consolidate and focus on the smaller names to which money is quietly moving. And while you’re sleuthing, follow the money to other sectors which are benefitting from the money outflows from big tech.

Zweig’s “Sacred Rules” and Why I’m Staying Long this Market

Wall Street great, the late Marty Zweig had two “sacred” rules:

·        “Don’t fight the Fed:” and

·        “Don’t fight the market’s momentum.”

Truer words were never spoken. Certainly, there is risk in this market. But I’m still willing to trade the long side because the market’s message is clear and highly reminiscent of Zweig’s “sacred” rules.  That’s because the New York Stock Exchange advance-decline line (NYAD, see below for more details) made a new high on 7/11 and 7/12/24 as money flows changed course after the better than expected CPI and dovish talk from Fed Chairman Powell.  That means momentum is to the up side (NYAD) and the Fed is closer to a rate cut.  So, although a correction is certainly possible, until proven otherwise we are in a sector rotation.

The signs have certainly been in place.  As I noted last week: “Momentum is alive.  Both the S&P 500 (SPX) and the Nasdaq 100 (NDX) indexes blew past recent resistance, making new highs.  But the action remains highly selective.  On the other hand, the wall of worry is well established and if CPI and PPI don’t deliver a nasty surprise, investors who focus on where money is flowing will continue to be rewarded.”

Thus, until a reversal unfolds, this market still has legs to the upside.  Yet, success requires adaptability.  In other words, keep it simple and just follow the money.

Stick with the Program

The news can be unsettling.  But staying calm and focusing on your portfolio is more profitable than fretting.  So, stick with your investment plan and let everyone else worry about everything else.   Here’s the formula:

·        Expect the unexpected; THERE ARE NO SURPRISES – JUST EVENTS;

·        Stay patient and stick with what’s working – if any position holds up, keep it;

·        Raise cash, trade small, hedge as necessary; and

·        Consider trading options to reduce market exposure.

Shifting Sands – Small is Beautiful, Tech is Going to Get Bumpy

Comparing the price charts for the Invesco QQQ Trust (QQQ) and the iShares Russell 2000 ETF (IWM) tells the story.  I’m not worried about big cap tech stocks in the long term, but QQQ is due for a consolidation which could last a few days or a few weeks, depending on how long it takes to get the very oversold RSI indicator back down to at least the 50 area, if not all the way down to an oversold reading of 30.  The first test for QQQ will be the 20-day moving average. 

Nimble trading has certainly paid off on recent technology trades.   For example, Smart Money Passport subscribers took a $1470 six day profit on Advanced Microdevices (AMD) before the stock reversed course on 7/11/24. 

Again, I’m not turning negative on technology. Indeed, I expect this aggressive selloff will likely turn into another dip buying opportunity.  Yet, in this market it’s prudent to take profits when they are available.

On the other hand, IWM has just broken out after a six month consolidation. In addition note the telltale signs of a potential short squeeze as the ADI line is falling (short sellers moving in) and the rising OBV line, as buyers move in.

On a more granular level, a great example of the shift in money flows in the market is evident in the homebuilder sector on which I’ve been and remain long term bullish.

Fortunately, investors who have been patient with the homebuilder sector may be in for better times, if interest rates remain tame. The iShares U.S. Home Construction ETF (ITB) delivered a nice reversal last week and are likely to head back to the top of their trading range in the short term. Check out my latest on housing and real estate here.

Bonds Yields Crash. And that’s a Good Thing for Homebuilder Stocks.

Bond yields plummeted last week, in response to a better than expected CPI inflation report and Fed Chair Powell’s dovish remarks.  The rally is likely to extend the recent drop in mortgage rates, which is bullish for the housing market.

The U.S. Ten Year Note yield (TNX) is now well below its 200-day moving average and is readying  for another test of the 4.1% level.  However, the effects of a move below 4.1% are a bit unpredictable as the stock market might interpret such a development as predictive of a recession.

If you haven’t noticed, the average 30-year mortgage is now below 7% for the fifth straight week.  The combination of the CPI number, the Fed, and improving mortgage rates are having a bullish effect on the housing market. See ITB above for homebuilder stocks.

In addition, the REITs are likely to benefit from money flows to smaller stocks and lower bond yields as well. The iShares U.S. Real Estate Market ETF (IYR) has just broken out to new highs.

If you’re a fan of small stocks, as I am, I recently recommended an out of favor small cap tech stock which is bucking the trend and moving steadily higher.  I also have a wide array of REITs and homebuilder stocks in my Rainy Day Portfolio  You can check them all out with a FREE Two Week trial to Joe Duarte in the Money Options.com. 

If you’re an ETF trader, consider, Joe Duarte’s Sector Selector.  It’s FREE with your monthly membership to Buy Me a Coffee.  Sign up here. 

Market Breadth Breaks Out Pointing to a Wider Rally

The Nasdaq 100 and the S&P 500 cooled off a bit after making a series of new highs.  But the New York Stock Exchange Advance Decline line (NYAD) made up for their pullback by notching new highs on 7/11 and 7/12/24. This is a bullish development for stocks as it signals a wider rally is emerging which increases the chances of picking winning stocks.

The Nasdaq 100 Index (NDX) backed off on 7/12/24 after notching new highs earlier in the week. NDX is very overbought and due for a consolidation. The first support to watch is the 20-day moving average. Both ADI and OBV remain in bullish territory.  ADI is falling now as short sellers try to knock the index down. OBV has not broken yet, suggesting buyers remain resilient.  This should be interesting to watch, as any correction could be short lived as dip buyers move back in.

The S&P 500 (SPX) also pulled back after notching its own new highs earlier in the week.  SPX is also overbought and due for a rest.  There is support at the 5400-5500 area, between the 20 and 50-day moving averages.

VIX Remains Below 13.

The CBOE Volatility Index (VIX), remained below 13, remaining bullish.  A move above 15-16 would be very bearish.

VIX rises when traders buy large volumes of put options.  Rising put option volume leads market makers to sell stock index futures to hedge their risk and leads markets lower.  A fall in VIX is bullish signaling lower put option volume, eventually leads to call buying which is bullish as it causes market makers to buy stock index futures raising the odds of higher stock prices.

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