Momentum Monday - Was The Volatility On Friday Just a Spike Or A Turning Point

SPY tested the area near its rising 20-day moving average five times since the beginning of the year and it bounced to new highs every single time. This is what happens during a strong uptrend. Last week, SPY tested its 50-day moving average for the first time in a while. Will it hold here and build a new base? This would be a sign of strength. Or will it continue lower and test its year-to-date VWAP near 500. This is a very possible scenario. 

Small caps (IWM) went down the most last week. Russell 2k gapped down after the March consumer inflation report came stronger than expected. IWM is currently at a major support area near 198-200. If the correction continues, 198-200 should turn into resistance. The next area of potential support is around 194 which is the volume-weighted average price since the rally started in November. It was the place where IWM bounced earlier this year.

The tech sector and especially mega-caps continue to hold better than the rest of the market. It makes sense. CPI came above estimates but PPI (producers’ inflation) came below estimates last week. Many corporations have been able to increase their prices while their cost have increased as much which has led to better profit margins. QQQ managed to hold above its 50-day moving average. If it loses 436, it will likely test its year-to-date VWAP near 430. The good news for QQQ is that while NVDA is pulling back, other leaders are waking up. Apple, for example, had a major bounce last week after revealing a new AI chip that will be used in its 2024 product lineup. Big tech remains a safe harbor unless there’s a war with Iran. Then oil would spike even higher and even tech stocks would probably experience a 10-15% correction. Don’t let a story about strong fundamentals and bright prospects lower your guard when it comes to using stops and having an exit strategy. No stock is immune during a real market correction. Take AMD, for example. After all the hope and hype about its role in AI, its stock is already down 30% in the past month and a half while QQQ is barely down 2.5% from its all-time highs.

Remember the premise behind the market rise in the past 5-6 months – the Fed said they are likely done raising rates and will soon begin the process of cutting. This is the narrative behind the price action. So far in 2024, we had a few CPI reports that came above estimates. One time is a blip, two might be a coincidence, and three times in a row is probably a trend. Commodity prices have not been sleeping as well. Oil, gold, cocoa, copper, and coffee have been on a major run. Price action changes when perceptions change. Perceptions change when the story we tell ourselves changes. The current narrative is that the Fed has painted itself into a corner and they will have to cut to save the Treasury market in an election year. This is why most dips are getting bought and will probably continue to get bought unless the Fed, all of a sudden, changes its message and actually raises rates. Unlikely, but not impossible. In the meantime, 5-10% pullbacks are completely normal. Granted, a 10% pullback in an index might mean a 30-50% correction in a previously hot individual stock. This is why we use stops, time our market exposure, and hedge when needed.