Issue #74 - New Sector Moves
Trend Of The Major Indices And Market Health
A snapback rally over almost the entire week pushed the S&P 500 2.67% higher on above average weekly volume. Technology outperformed with an even bigger bounce with the Nasdaq Composite up 4.23% for the week and Nasdaq 100 up 3.94%. Small caps also outperformed the S&P 500 with the Russell 2000 up 2.70% for the week. One important technical observation from this week's action is all the major indices have found support at the 30-week EMA (Exponential Moving Average) during this correction, including the Russell 2000 which had the deepest correction.
Earnings drove a lot of volatility in stocks this week. As discussed last week, its not the earnings that matter, but the reaction to earnings in terms of price and volume action in stocks that matters. In terms of the mega-cap stocks that reported earnings this week TSLA had a positive reaction to earnings on above average volume and closed near the highs of the week. TSLA could now be back in Stage 1 after a Stage 4 decline. META had a negative reaction to earnings, gapping down on heavy volume but it still held the 30-week EMA. GOOG and MSFT both had positive reactions to earnings with GOOG gapping up on volume and closing at new highs. There were some other negative reactions to earnings in consumer cyclical stocks especially, with HOG and WHR both getting hit hard after earnings. However the overall reaction to earnings this week was positive, especially the semiconductors sector which actually reacted the best to mega-cap tech earnings and is discussed below in the sector review.
Indicators were another area of the market that moved in favor of the bulls this week. After having notable weakness late in the week on Friday last week, the VIX was crushed this week and closed below the 10-week EMA. As discussed in the Shorting Guide, the VIX closing below the 10-week EMA is a bullish indicator for the stock market. The VIX is still technically above support and still above the 30-week EMA, but any more weakness next week would be even more bullish for stocks. The percentage of stocks above the 50 day moving average in the S&P 500 moved up strongly to 45.8% from its low of 35.4% last week. This is one of the strongest breadth thrusts higher for 2024 and is coming off of an oversold level, which is a bullish setup for the stock market.
The biggest negative with the current market is the duration of this correction is on the low side at just three weeks. It did eclipse -5% in terms of size for the S&P 500 in just 3 weeks from the recent highs. Volume is the other negative where volume in Stage 2 breakouts this week was still on the low side. But volume on the S&P 500 for the week was more than average weekly volume for an up week for the first time since February.
The key takeaway from this week is the weight of the evidence has now shifted back in the bullish direction. It's not as good of a signal as a deeper bottom with more volume coming into it. But there was a nice increase in Stage 2 breakout activity this week and evidence of sector moves starting to occur. Sector moves are really where big profits are made in the stock market and they tend to get going before the major indices reverse course. Unless we see a complete breakdown from this week's bullish action next week, the bias should be back to trading the long side, but it is probably prudent to move in slower in case this correction has more backing and filling before it is over.
Sector Review
Semiconductors (SMH) - semiconductors roared back this week and reignited their sector leadership. NVDA which is the leading stock in the sector moved back above its 20dema and SMH did the same thing. After the early March top SMH corrected about -17% so this was a large correction for the sector. AMD was down -36% for example and many other semiconductor stocks were down -20% to -30% during this correction. But notice how most of these stocks found support at the 30-week EMA and continued to move higher this week in Stage 2. Stock market corrections tend to bring even the best stocks down to the 30-week EMA and that's what this correction did for the semiconductor stocks.
China (KWEB, FXI) - both major Chinese ETFs completed Stage 2 breakouts this week on above average volume. Volume in individual Chinese stocks however could have been much higher given the sector breakout. More big volume would be bullish after this breakout so that's a key thing to watch for over the next few weeks in the Chinese stocks.
Gold and Silver (GLD, SLV, SIL, GDX) - this was a wild week for the precious metals where silver was down -5% for the week but the silver stock ETF SIL was up almost 2% for the week. Despite a large pullback volume has dried up in the precious metals which is typically bullish when pulling back to important moving averages. Gold and silver might need a little more time to process their pullback, but as long as volume remains low it should lead to a renewed uptrend once it is over.
Bonds (TLT, BND, HYG) - volume in the bond ETFs dried up this week significantly. Weekly volume in the ETF BND which is the largest bond ETF in the stock market was the lowest of 2024, which includes holiday shortened weeks. HYG also had its largest weekly upside volume since 2023 when it was in an uptrend. So the bond ETFs could be slowly turning here if more buying pressure comes into this market next week.
Cannabis (MJ, MSOS) - volume continues to dry up on the pullback in MJ and MSOS along with other stocks in the sector. MJ and MSOS are also holding key moving averages on this pullback. This still looks like a major Stage 2 investor breakout that could be ready to ignite higher if the S&P 500 is coming out of a correction.
Stage 2 Breakouts
The biggest and most important change this week was a big jump in Stage 2 breakout activity and evidence of sector moves occurring in the stock market. As discussed in the Timing Model, these are important characteristics of a stock market that is transitioning from corrective activity to a new uptrend. It's possible the S&P 500 still needs more time to completely process this correction, but this week was a good start and the only thing missing was heavier volume on more breakouts.
The worst thing that could happen next week would be immediate dumping in the sectors that acted well this week. So it will be important to see semiconductors, Chinese stocks, gold and silver mining stocks, and cannabis stocks pull back on lighter volume on any pullbacks next week. And if they continue to move higher look for more heavy volume, that would indicate continued accumulation and more evidence of a bottom for the S&P 500.
One item that has been discussed in past newsletters is favoring recent IPOs when choosing which Stage 2 breakouts to trade. There's multiple recent IPOs on the breakout list this week and there will likely be more to trade this year, especially if the IPO market finally starts to improve. IPOs tend to capture the imagination of the stock market more than well established stocks, which leads to bigger gains when speculation heats up in these stocks.
Best Stage 2 Breakouts
NVDA, SMCI, PI, and VRT are semiconductor stocks that all moved higher this week and are leading the sector. VRT is on its 4th Stage 2 breakout now during this uptrend but volume was significant on the move higher this week, and this stock is also a recent IPO.
BILI and TME are Chinese stocks completing Stage 2 breakouts this week. BILI is completing a Stage 2 investor breakout on heavy volume, while TME is already an established leader with a continuation breakout and no overhead resistance.
SNAP is a tech stock completing a Stage 2 investor breakout on its heaviest weekly upside volume since early 2023. This stock has already had a number of failed moves higher out of its Stage 1 base.
CAVA, SG, and ELF are consumer cyclical stocks and recent IPOs that had strong moves higher this week. All three stocks also have minimal overhead resistance. ELF did have a recent pullback on heavier volume and it is also later in its overall uptrend, so might need more time before moving higher.
The following are the best Stage 2 breakouts from the past week:
NVDA, SMCI, PI, VRT, NEM, MUX, BILI, TME, SNAP, CAVA, SG, ELF
All Stage 2 Breakouts From The Past Week
Semiconductor stocks - NVDA, SMCI, PI, VRT, ADI, TER, TXN, ALGM, MCHP, DIOD, QRVO, TER
Gold and Silver Mining stocks - NEM, MUX, GROY, NGD, RGLD
Artificial Intelligence stocks - SOUN, AVAV, ESTC, PEGA, PLTR, KTOS
Fintech stocks - SOFI, APPF
Tech stocks - SNAP, DDOG
Healthcare/Biotech stocks - CGEM, RMD, BSX, DGX, NVS, SNY
Chinese stocks - BILI, PDD, TAL, BEKE, ZTO, BZ, FUTU, TME, JD, KC, RERE
Autos stocks - GM
Basic Materials stocks - TECK
Consumer Cyclical stocks - CAVA, SG, ELF, HAS, SE, TSCO, SKX, WEN
Airlines stocks - VLRS
Oil and Gas stocks - EQT, WFRD
Financials stocks - RILY, GCS, TD, TRU, BCS
Communication Services stocks - RBBN
Industrials stocks - KEX, UNP, TPC, ZIM
Consumer Defensive stocks - LRN, ELF, KMB, UL
(Note: Stocks with a * were previously on the Focused Watchlist and have now completed a Stage 2 breakout)
(Note: Stocks in bold broke out on 2x average weekly volume or higher for the week)
Stage 2 Breakout Pullbacks
With the weight of the evidence improving this week and the S&P 500 just having pulled back around -6%, pullback buying opportunities continue to be a good place to look for new trades. This past week VKTX was up over 17%, CGC was up over 12%, and MUX was up over 9% and these were 3 different stocks on the Stage 2 Breakout Pullback list last week. In fact all stocks that were on the list from last week were up on the week, which shows how important the direction of the overall market is to individual stocks. Getting the overall direction of the market right is paramount to trading successfully.
This week's pullback list continues to focus on strong sectors. These stocks have the best opportunity to continue to move higher even if the S&P 500 still has to process more of a correction before the corrective action is finally over. Stronger sectors tend to start outperforming the S&P 500 the earliest in a correction and tend to start resisting the correction as it gets older.
Fintech stocks interestingly are continuing to outperform the S&P 500 during this correction as evidenced by the ARKF ETF relative strength line outperforming the S&P 500. Cannabis stocks continue to consolidate but volume remains elevated which indicates speculation is still hot in the sector. Recent IPOs are also important to focus on and CART, HOOD, PAY, TOST, AFRM are all recent IPOs, with AQST having an IPO in 2018.
Semiconductor stocks - MU
Computer Hardware stocks - DELL
Cannabis stocks - CGC, ACB, VFF
Gold and Silver Mining stocks - AG, AGI
Healthcare/Biotech stocks - AQST
Fintech stocks - HOOD, PAY, TOST, AFRM
Consumer Cyclical stocks - CART
Sector Trades
Back in Issue #64 a new section of the newsletter was created to periodically highlight stock market sectors that could be set to outperform during the next cycle in the stock market. Leading sectors can dramatically outperform the S&P 500, and sector ETFs are a great way to play them. Sector ETFs diversify away the risk of owning an individual stock, and they also eliminate the chance of owning the wrong stock in a sector that doesn't perform well while the rest of the sector flourishes. Sector ETFs also reduce exposure to gap down risk from earnings releases for individual stocks, which can derail even the best stocks periodically.
Stan Weinstein discusses trading multiple sectors when more than one sector is breaking out into Stage 2. What this does is creates a process of discovery where trades are taken in different sectors that break out and start outperforming the S&P 500. Then more observations can be made to determine which sectors are continuing to outperform and which sectors are starting to lag. At that point capital can be reallocated and concentrated into stronger sectors as a major move matures and diverted away from sectors that are starting to underperform. So in essence its a process of planting seeds initially in multiple sectors that are breaking out, and then later allowing the stronger trades to flourish while cutting back on the weaker trades that start to stall out.
Semiconductors outperformed during the last major uptrend in the stock market, and are showing early signs of being a leading sector again. The other three sectors below are recent Stage 2 investor breakouts that have potential to produce major moves higher out of long term bear markets. These sectors all have the potential to outperform the S&P 500 during the next major uptrend in the stock market.
Long
Semiconductors ETFs - SMH, SOXL
Cannabis ETFs - MJ, MSOS
Gold and Silver Miners ETFs - GDX, SIL, NUGT
Chinese ETFs - KWEB, FXI
Education
Besides weekly commentary the education portion of this newsletter continues to grow.
- Terminology - Stage Analysis basics and terms
- Timing Model - timing both bottoms and tops in the stock market
- Correction Playbook - learning how to navigate stock market corrections
- Buy Signals - refining the buying process
- Shorting Guide - tactics for shorting stocks during stock market corrections
- Chartbook - study past big winning stocks
- Stan Weinstein's Book
Disclaimer
The views and opinions expressed on this website are for educational and informational purposes only, and should not be considered as investment advice. The author may hold positions in stocks mentioned on this website. The author of this website is not a licensed stockbroker or financial advisor. Nothing contained herein should be construed as a recommendation to buy, hold or sell any securities or financial products. Always seek the advice of a financial advisor and do your own independent research prior to making any trade or investment decisions.
We do not guarantee the accuracy or completeness of any information on this website. Such information is provided “as is” without warranty or condition of any kind, either express or implied. Past performance may not be indicative of future results. This website could include inaccuracies or typographical errors.
We are not liable or responsible for any damages incurred whatsoever from actions taken from information provided on this website, including financial losses. Since all readers who access any information on this website are doing so voluntarily, and of their own accord, any outcome of such access is understood to be their sole responsibility. In no event shall we be liable to any person for any decision made or action taken in reliance upon the information provided herein.