Momentum Monday - Bullish Sector Rotation Continues, But Signs Of Froth Showing Up.

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Good Monday morning everyone.

Some silliness continues to creep into the markets. The ‘experts’ keep saying only 6 stocks are helping the market. Meanwhile, small caps had their best week in forever, Carvana is up 800 percent this year, a drink full up of cocaine and caffeine is juicing $CELH stock which has excited Goldman’s Sack enough to ask Liquid Death to go public and Nikola, the morally and finacially bankrupt car company SPAC has quadrupled in the last few months. Did I mention bitcoin miners up 400 percent his year and cruise ship stocks and airline stocks melting up?

What I mean to say is we are in a bull market, but there are signs of froth.

As always, Ivanhoff and I get into all this on our weekly show.

You can watch this weeks episode right here on YouTube. It is easy to subscribe and if you do every Sunday you will get an alert when we post the show to YouTube now with the ‘chapters’ so you can easily find the show subjects.

Chapters:

• Intro (0:00)

• CPI (1:13)

• Market Breadth / Rotation (1:43)

• Big Tech (4:40)

• Stock Pickers Market (7:18)

• Healthcare Names (7:40)

• Earnings (8:45)

• NFLX (10:06)

• Momentum (11:00)

Here are Ivanhoff’s thoughts:

There are two ways to approach a melt-up market:

1. Participate in it chasing momentum with one foot out the door, meaning having an exit strategy because sooner or later all trends end, depending on your time frame of operation.

2. Take profits on strength and wait for a pullback to get involved again.

One is trend following, the other is swing trading. Both approaches have their merits and can be lucrative. The price action last week was a good example of the pros and cons of both approaches. One lets you capture much bigger moves but it comes with having to go through bigger drawdowns. The other doesn’t produce huge winners but it keeps any drawdowns minimal.

Inflation continues to come down. Both, CPI and PPI came below estimates. This led to another dip in interest rates and a big rally in the stock market. Last week we saw big bounces and breakouts all around. In mega caps, mid-caps, and small caps. In tech, biotech, industrials, and financials. The US dollar pulled back to a new 52wk low. The stocks with the highest short interest went up the most. Less than a year ago, people were talking about potential bankruptcy in Caravan (CVNA). This year, it is among the best-performing stocks. At some point last week, it was up more than 800% year-to-date before giving back some of its gains.

Bull markets often correct through sector rotation and this is exactly what we saw on Friday, when most high-beta stocks pulled back while capital went into lower-volatility sectors like healthcare and consumer staples. It is a normal part of the cycle. When there’s too much frothiness and everyone thinks it is easy to make a lot of money every day, there’s usually a rug pull to beat some sense into the chasers.

The new earnings season has just begun. Judging by the significant increase in prices in the past three months, one can say that expectations are high. This doesn’t mean they cannot be exceeded in select cases but one has to be aware of the higher hurdle ahead. Expectations matter. We all saw what happened with bank stocks on Friday. JPM started to rise two weeks before its earnings report. They crushed estimates and gapped up, only to give their entire gain up later in the day. Profit takers overwhelmed any new demand for the stock, at least for the time being. Pay attention to how the market reacts to earnings because this will be the key for the duration of the current rally.

Onward…

A few more links…

Charlie’s week in Charts

The Stocktwits momentum 25 Lists

Have a great week.

Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. For full disclosures, click here.