The biggest moves in the stock market have a lot in common… Is the pullback already over?… The breadth issue remains… When the long-term future is uncertain, get trading…
By Michael Salvatore, Editor, TradeSmith Daily
The top 10 leaderboard for the biggest single-day market cap gains has been shuffling around lately, with Nvidia's (NVDA) $250 billion surge on Thursday taking the crown Meta Platforms (META) held since Feb. 2, with its $196 billion move.
But looking up and down the board, and you see a striking theme.
It's all big tech. It's all post-2020. And all but two of these single-day surges are after blowout earnings reports. Here's the chart from Bloomberg.
It's yet another example of how much bigger big tech companies have become in the wake of the pandemic — and the U.S. economic response to them.
A lot changed in 2020, namely the large injection of liquidity into the financial system by both traditional methods (The Federal Reserve's quantitative easing) and more novel ideas (Washington dropping proverbial cash out of helicopters through stimulus checks). That liquidity found a cozy home in the biggest of the big tech companies, which were then able to fund increasingly grand innovations on multiple fronts.
It's also a testament to how well these companies manage themselves. Being a "tech company" alone doesn't guarantee such wealth accumulation. Just ask any of the many tech IPOs from 2021 that are still deep underwater from their listing.
Unlike those, the companies on the list above continually grow their earnings and manage their cash well — something we've covered time and again — and thus these moves are earned.
That's what sets this very bubble-looking activity apart from true bubble action we've seen in the past. These are not pre-revenue, maybe-someday-they'll-profit companies coming to market and being rewarded with billions of dollars. As Bloomberg columnist John Authers puts it, "there's a there, there."
If the first "there" is growing earnings, the second "there" is artificial intelligence. And that's what makes this all so different this time — no knock on wood necessary.
That means we shouldn't be so quick to scoff at these new highs. And as I write two hours ahead of open on Friday, S&P 500 futures are digesting the new highs well. None of the major indices are up or down by more than a quarter of a percent.
That begs the question… did the pullback we recently warned of end before it began?
I'm hesitant to look at the few 1% chops down we saw in the S&P over the last few weeks and claim the worst is over. There are still plenty of powerful warning signs.
One of which is Jason Bodner's proprietary Big Money Index… which has recently turned from a clear sell signal into more of a mixed bag.
Here's the latest reading:
If you're unacquainted, the yellow line on this chart tracks the number of buy and sell signals Jason's system detects from major Wall Street institutions. The higher the line, the more Big Money is buying in, and vice versa.
Cross the red dotted line at 80%, and you have a broad-based overbought signal. Cross the green dotted line near 25%, and you have an oversold signal. When the yellow line crosses either dotted line, you get a sell or buy signal, respectively.
But this time, stocks have kept climbing even as the Big Money buying has slowed. Here's the word from Jason on this unusual action…
[The] Big Money Index (BMI) is no longer overbought, currently at 73.6 and well under the 80 threshold signaling unsustainable buying. On the other hand, selling hasn't increased much. The BMI is falling because buying has slowed.
[…]
The BMI is falling not because selling has accelerated but because exceptionally big buying back in December continues to roll off the 25-day equation that makes the BMI.
[…]
When the BMI falls from overbought, we typically see a few sectors start to rot. Not this time. At least not yet. I see something entirely different, with 10 of 11 sectors showing virtually no signs of selling.
And the one sector where I do see a little bit of selling, Communications, is the smallest of the bunch. Only 1.2% of the nearly 6,000 stocks my system tracks are in Communications. And when I screen for stocks traded by big investors, I get only 31 Communications stocks. Hardly cause for concern.
I still expect stocks to get more volatile. The data predicting it is nearly flawless. It's possible the BMI can meander lower while stocks stay relatively strong, but at least some choppiness is much more likely.
It's less a case of "Wall Street is selling" and more "Wall Street isn't buying as much as they were a couple months back." That's not the death knell for stocks like we saw when the BMI fell from overbought levels last August.
Long story short, Jason does still expect volatility even if the overall trend remains higher. And considering his readers managed to lock in huge, risk-free gains on Super Micro Computer (SMCI) during last week's crazy price action, I'd say Jason knows a thing or two about volatility amid strong bullish trends.
Here's another piece of evidence we can keep chewing on…
❖ Short-term market breadth is turning slightly higher…
Last week, we showed you that the number of stocks in the S&P 500 trading below their 50-day moving average (S5FI) — one measure of market breadth — was sinking while the index continued to rise. It's a classic reversal signal.
This week, the trend isn't much changed… but the measure has turned higher in the short term. And the measure of stocks above their 200-day moving average (S5TH) has held steady. Check out the updated chart below.
The S&P (blue line) continues climbing… the 50-day breadth indicator (orange) seems to be bottoming out… and the 200-day breadth measure (turquoise) looks the same.
I've also added a 50-day moving average to each breadth indicator (the purple lines) to get a sense of where each line is trending. S5FI broke its short-term uptrend back near the start of the year, while S5TH is right in line with it after dipping just below.
It's too early to tell if the market participation picture will improve, but keep an eye on these indicators whenever you see the market make a big move.
A general cannot win a war without his army. And despite the major momentum moving large-cap tech higher, we're simply not seeing most other stocks participate. That is and will always be a warning sign.
What to do in a situation like this?
We've done a lot of zooming-out in TradeSmith Daily lately, but it's often helpful to zoom in…
The concept of a "safe portfolio" is about to be completely redefined.
For the last year and a half, everyone has been pushing their money into cash. But what if there was a hidden risk that was going to leave them exposed? I'm not talking about the death of the dollar or anything silly like that.
❖ An-E 2.0 helps you "zoom in" on the stocks breaking from the pack — higher or lower…
Think again about that breadth chart above. Only 64 stocks in the S&P 500 are trading above their 50-day moving average. That means 436 stocks are not.
That's 64 opportunities to trade positive short-term momentum… and hundreds to trade to the downside.
That alone is an edge you can exploit… if you have a lot of time to go through charts.
And of course, there's no guarantee either trend will continue.
To help solve this problem, TradeSmith debuted An-E last year. It's short for Analytical Engine — an A.I.-driven tool that can forecast the move of any stock we track 21 trading days in advance.
Go right here to learn how… and then stick around for news on Wednesday's presentation of An-E 2.0.
This upgrade brings with it a ton of improvements, including a way to use An-E's predictive power to multiply the move of any stock, up or down, into much larger gains.
I highly suggest you see the results for yourself right here… and make sure to attend next Wednesday's event at 10 a.m. Eastern to learn all about how An-E 2.0 can help short-term traders dominate this market — posting gains that make even the daily moves of NVDA and SMCI look tame.
To your health and wealth,
Michael Salvatore Editor, TradeSmith Daily
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TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
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