On Thursday The Stock Market Rally Nasdaq Generals Got Shot – Mike Swanson (07/24/2020)

Stock market rallies tend to have three phases to them. In the first phase, which is the move right off of a bottom EVERYTHING goes up and you can buy anything and make money – you don’t even have to know what you are doing. In fact the stocks that have worst fundamentals and are the most heavily shorted even go up the fastest on that first move.

In the second phase these volatile junk stocks peak out (think ones like NCLH or airlines). And in fact most stocks start to drift. This began in early June just days after Las Vegas opened its casinos back up – a symbolic start to the national reopening. Traders bought into that event and sold on it.

But the rally can continue – and this one did continue – with the help of several powerful big cap leadership stocks. Typically rallies do go on until these stocks top out. There is a phrase even to the effect that when the generals are shot the market goes down.

On this rally these stocks have been the big cap tech stocks like FB, AMZN, GOOG, NFLX, MSFT, AAPL, and some questionable ones like TSLA. Yesterday when the stock market dropped some laggards got smashed, but inside the S&P 500 it was mostly these very leadership stocks that fell the most. Take a look at this screen shot I took of my TC2000 stock screening software showing you the worst performing stocks in the S&P 500 yesterday.

Notice that AAPL was one of the worst performing stocks in the ENTIRE S&P 500 yesterday. So was MSFT, AMZN, GOOG, and FB. Take a look at this chart of AAPL.

The uptrend that acted as support for AAPL since March is broken now. The momentum rally is over. That means AAPL is now starting a new downtrend or is going to go sideways for months.

This is a bad sign for the stock market rally, because it means that phase three is basically over. Yes the stock market can go up today or drift for a another week or two before really falling big, but this is a sign that the risks in the US stock market have now grown.

Stocks trading below their 150 and 200-day moving averages lagging the market now are especially dangerous despite some of them being very popular with Robinhood traders.

It’s best for new traders who got into the market for the first time this year to just step back for a bit. They should take a few weeks off and let the market dip some. They should just step aside until Labor Day unless they want to get into precious metals and mining stocks. The reality is that there is no “V” shaped economic boom happening that was predicted by so many in April and the reopening has now fizzled. You make money by adapting to changes in the economy and market trends and not sitting in denial of them holding on to no longer valid fantasies.

Concepts such as the “V” economic boom and “America 2.0” were April memes that didn’t pan out.

I’ve used Las Vegas as a proxy for the strength of the reopening and LasVegasAdvisor.com reports that “statistics from VisitData.org, which tracks foot traffic via 13 million users of Foursquare, a smartphone social-networking service, indicate that visitation to Las Vegas casinos is on a downward trajectory. From a high of 550,000 on Saturday July 4, the number of visitors in Las Vegas casinos is estimated to have dropped to 400,000 on Saturday July 11, then further down to 350,000 on Saturday July 18. For the week starting on Sunday July 12, visitation was down 44% from February’s count.”

As for the argument that “stay at home stocks” is the way to go so buy NFLX and AAPL well they got gored yesterday by bears. The argument is valid when the momentum is up and up in them, but now at best they will go sideways for a few weeks before the momentum resumes and more likely they have topped for the year. Now is the time to be cautious! It is time to sell laggards and move money into what is starting new bull markets for real this year by going from a stage one base and into a stage two bull market as silver has done this week.

-Mike



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