I got a lot of emails about the stock market after it rallied yesterday.
My view from Monday that this is a stock market with risks remains. I think it’s going to take a few days and maybe even a week to see if yesterday’s rally was for real. If it’s going to fade it’s going to take some time to drift and roll-over. At the same time if it’s going to resume going to highs and beyond look for the market to digest this recent move first. The problem is that stage three tops and even bear markets are characterized by big swings up and sudden drops down. And so far this week we got a swing up.
But the fact of the matter is that the internal damage done in October remains and almost all of the big leaders of the past are now still lagging. If the market is still bullish it’s going to spend weeks if not months like it did this summer going sideways to work off the damage.
And for the market to go higher and higher for the rest of the year will take new leadership to drive it up, because the past leaders are still lagging. Just look at NVDA for example.
If you can remember we saw the potential for new leadership in September with breakouts in bank stocks and defense stocks, but those turned into fake breakouts and everything fell apart in October.
Yesterday’s rally was not driven by the big cap tech stock, but a surge in healthcare stocks. UNH and MRK made new highs in the DOW while defensive stocks MCD and KO did too.
Take a look at UNH in the DOW for example:
If the market is going to rally all year like so many are predicting the rally will be led by these defensive DOW stocks.
Here is one of the biggest healthcare ETF’s to give you an idea of what that sector did.
I saw lots of people touting these sectors last night, because they went up so much.
I’m not one that just buys something because it goes up a lot in one day and I have specific patterns that I use to make sure I have a good risk to reward entry point when I buy something.
I decided several weeks ago to take a defensive stance as market risks were apparent and I did not see great setups to buy into.
At the moment two positions in the seven position portfolio remain in cash.
There is another sector that I’m watching though that might line up the way I like before the weekend.
If it does I’ll do an update on it for you on Sunday.
The single best trading pattern I have ever used is The Two Fold Formula.
To grab it go here.