Among the major market indexes the Dow led on Friday with a 2.12% move higher on higher volume. Industrials, cyclicals, and economically-sensitive stocks all rushed to the upside as money came pouring in. One example: Alcoa (AA) which posted a bottom-fishing buyable gap-up (BFBGU) on Friday using the 33.94 intraday low as a selling guide. While the move was healthy, it does not look like much on the overall daily chart as AA closed just below its 20-day exponential moving average and remains within a well-defined downward trend channel. Volume was quite strong on Friday, so perhaps this has legs up to the 50-dma, at least. Otherwise, we could be looking at another one of these one-day wonder rallies.
The market reaction, while highly synchronous among all the market indexes, was not in sync with interest rates and the U.S. Dollar, both of which rallied on Friday. While the market seems to be discounting not only a Fed skip but also the possibility that the Fed is done raising rates as it tries to engineer a successful soft landing, interest rates and the Dollar seem to argue otherwise. This, however, is a market that operates against a backdrop of highly bizarre and unique underlying conditions. Whether Friday's broad market move was a one-day wonder reaction to the jobs number and the passage of a debt-ceiling bill from Congress will likely be determined as we move into the new trading week.
A higher U.S. Dollar Friday weighed on precious metals prices as gold gave up on an attempt to clear the $2,000/oz. level. It continues to hold support in the $1920-$1950 area, but a nasty reversal at the 50-dma, coinciding with the $2,000 level, on higher but not heavy selling volume served up some stiff resistance on Friday.
AI meme-stocks have remained a hot area of the market after the CEO of Nvidia (NVDA) admonished attendees at a conference two Fridays ago that those who fail to get on the AI train will be left behind. Investors took that to mean them, and they all promptly dove into AI-related stocks on Thursday morning when trade resumed after the long Memorial Day Holiday weekend. Two of the biggest movers as of late, Broadcom (AVGO) and Nvidia (NVDA) could not make much net progress beyond last week's post-earnings gap-up moves despite the massive gap-up move in BRCM Tuesday morning. Ultimately, however, BRCM played out the week as a Century Mark short-sale entry along the $900 price level on Tuesday while NVDA is playing out in a similar manner along the $400 Century Mark. Given the huge runs in this thematic sector, namely the AI meme-theme, some consolidation, at the very least, may be likely at this stage. Keep in mind that these are not your ordinary meme-stocks - these names generally have real businesses with real revenues, and even some earnings thrown in for good measure. Thus, the current AI meme-theme mania is unique in that it is centered in names like AAPL, AMZN, GOOG, MSFT, NVDA, BRCM, AMD, MRVL, AMAT, KLAC, LRCX, NOW, and WDAY, to name just a few. In some cases the AI connection is tenuous or over-stated, but the meme has been powerful enough to move them all higher in May.
The Market Direction Model (MDM) remains on a CASH signal. Here is a recent article that explains why. Patiently waiting on the sidelines during such unusual situations is key as the various metrics such as the advance/decline line and number of new lows vs new highs for major indices remains bearish. Capital preservation is paramount.
The CME Fed Fund Futures now show a rate hike in July instead of June while US Treasury yields and the dollar fell Thursday morning after government data showed lower labor costs. There is also some ebullience over the debt-ceiling bill being finalized. But this will cause the TGA to materially rise which will remove liquidity from the markets. Liquidity and market direction show strong correlation in this QT environment that started in early 2022:
I will be watching for a drop in liquidity after the debt ceiling is raised since TGA will jump as per this equation:
Fed balance sheet - TGA (treasury general account) - RR (reverse repo) = Liquidity
Of course, should markets move higher despite the above, the MDM will switch out of cash into the next opportunistic buy signal. Yet major broad indices such as the NYSE Composite remain in overall downtrends despite what may turn out to be a one-day wonder reaction to the jobs number and the passage of a debt-ceiling bill from Congress. Indeed, there may be an opportunistic sell signal assuming the chart above continues to hold true. Inflation remains sticky spurring at least one more rate hike so money remains tight.
On a risk/reward basis, the MDM has strongly outperformed overall over the last few years due to the material change made in Feb-2019. Patience during historically unprecedented periods remains a prudent course and brings to light a simple and extraordinary passage from Jesse Livermore’s 1940 book, "How To Trade Stocks":
“Many years ago I heard of a remarkably successful speculator who lived in the California mountains and received quotations three days old. Two or three times a year he would call his San Francisco broker and begin writing out orders to buy or sell, depending on his market position. A friend of mine, who spent time in the broker’s office, became curious and made inquiries.”
“His astonishment mounted when he learned of the man’s extreme detachment from market facilities, his rare visits, and on occasions, his tremendous volume of trade. Finally he was introduced, and in the course of conversation inquired of this man from the mountains how he could keep track of the stock market at such an isolated price.”
“‘Well…I make speculations a business. I would be a failure if I were in the confusion of things and let myself be distracted by minor changes. I like to be away where I can think. You see, I keep a record of what has happened, after it has happened, and it gives me a rather clear picture of what markets are doing. Real movements do not end the day they start. It takes time to complete the end of a genuine movement. By being up in the mountains I am in a position to give these movements all the time they need. But a day comes when I get some prices out of the paper and put them down in my records. I notice the prices I record are not conforming to the same pattern of movements that has been apparent for some time. Right then I make up my mind. I go to town and get busy.”
“That happened many years ago. Consistently, the man from the mountains, over a long period of time, drew funds abundantly from the stock market. He was something of an inspiration to me.”
That said, opportunistic themes come along every so often such as the outperformance in alt-currency, lifeboat stocks in precious metals and Bitcoin earlier this year which was profitable to members. While this does not impact the MDM which looks to capitalize on broader trends, it illustrates why the trade of a lifetime comes along every several weeks. We remain vigilant as new data presents the next opportunities.