Momentum Monday - A Pullback Due in The Constructive Rally ?

So far, 2023 is a mirror image of 2022. The weakest stocks from last year are like rockets year-to-date. Anything that did well last year, has been under pressure. Clear rotation from old-economy sectors back into tech. The reason is not important. It could be a mean reversion after an over-correction; it could be the market assuming that the Fed is almost done raising rates and the economy is still strong. Even the Fed acknowledged that inflation is coming down in many sectors. This is exactly what the market has been pricing in and wanted to hear. Everything ripped higher after Powell’s comments.

What matters more from a practical perspective is the market reaction to earnings so far this quarter. Every single mega-cap tech company either reported earnings below estimates or guided lower. The market didn’t care. Even disaster earnings reports like Intel, Goldman, and Snapchat could not hold them down for too long. The market is sending a clear message. It’s as if it is saying that the reports were so bad that they can only get better from here. The sentiment is extremely bullish. Any bad news is considered temporary and a reflection of past events. Any good news is considered an argument that things are getting better.

Keep in mind that morning shakeouts are normal in any market environment. During bear markets, we can often see a gap up and then a selloff with a weak close. During bull markets, we can see a gap down or quick dip at the open, and then a rally with a strong close. Every slight dip is getting bought in tech stocks lately. The number of accumulation days has been expanding quickly too. Up days are plentiful and on much higher volume. Down days have been rare and on low volume. This is a bullish market behavior. It’s anyone’s guess how long it is going to last. The indexes are certainly extended above their short-term moving averages (10 and 20dma). They can resolve that by either pulling back or going sideways – the so-called time consolidation. Everyone knows the saying “don’t find the Fed”. There’s an even more accurate expression about this tape – “don’t fight the market”. Obviously, that doesn’t mean blindly chasing extended setups where you have to risk $5 to make $2 potentially.