Don’t Buy Too Fast

Let’s spend our mid-week market time together talking about the “bottom.”

There’s nothing better than the feeling that the market has put in a bottom when you’ve got a pile of cash ready to buy stocks. You’ve got that pile, right?

There’s also that “other” feeling. The feeling a week after you bought all those stocks you wanted at a discount when the market suddenly turns and heads to even lower levels than before.

That’s where we are right now.

Last week, the Nasdaq 100 had one of its toughest of the year. The index was down 8% from its March highs. The tech-heavy index has rallied 3% since then.

Was that a bottom?

The S&P 500 dropped 6% from its highs, now trading 2.5% from its lows.

Bottom?

The Russell 2000 Index – the one index I’ve been hammering your head that you need to watch – 9.7% from its highs and 4% from last week’s lows.

Do you think that’s all the selling?

The answer is: Not likely.cnn fear & greed index

This week, the CNN Fear & Greed Index dipped into “fear” readings. That’s progress. But remember, we want to see a trickle of blood running in the streets.

Right now, the market is just bruised.

Market bottoms aren’t convenient. They don’t happen when everyone is watching. You usually notice that they “happened” not that they are “happening.” They are a hindsight occurrence.

Last Friday, the financial media looked like they were heading out to a party. Air high-fives and fist pumps as they felt like “this may be it.” That last part was a quote from someone on CNBC that I respect a lot.

What everyone is forgetting is that we’ve still got roughly 63% of the S&P 500 left to report earnings.

We’re still looking at numbers coming from the likes of Microsoft (MSFT), Apple (AAPL), Alphabet (GOOGL), Amazon (AMZN), Super Micro Computer (SMCI), and other stocks with exceedingly high expectations.

Sure, Tesla (TSLA) is trading higher in the pre-market on Wednesday, but did you really look at hope bad that stock’s earnings report was? I’ll talk about that in a moment.

Here’s the Point

This week’s rally is a convenience manufactured by technical analysis. Stick with me for a minute.

Last week, we talked about the fact that most of the trading volume was triggered by institutional algorithms. Two triggers went off on Friday.

First, the S&P 500 and Nasdaq 100 both hit “technically oversold” reading from their respective relative strength indexes (RSIs).

Second, the S&P 500 cracked below the 5,000 mark, which is round-numbered support of course.

The IWM did nothing.

the s&p 500 technicals sparked what may be a dead cat bounce

Those two triggers, along with the fact that we were getting close to a 10% correction, was enough to get the algos buying. According to the volume, they’re not buying big, which means Wall Street isn’t confident that we’re done.

They need to be.

Let’s go back to the exceedingly high expectations.

I wish they could all be like Tesla.

I wish that all the companies that will report over the next two weeks had expectations as low as Tesla.  One other company does, it’s Apple, but the rest of the group is expected to have a banner quarter.

All it takes is one or two of those companies I mentioned to fall short or guide lower, and we’re right back into the selling cycle.

Bottom Line

There are a few companies out there that are worth a taste right now. Super Micro Computer at $700, Nvidia (NVDA) at $800, and a few others. But remember that you may get a better opportunity to buy those at lower prices in the coming weeks.

Here’s what to watch for…

The S&P 500 must remain above 5,000. A break back below that simple number will cause the sellers to pick right up where they left off last week.

The next two days will be beyond critical.

Meta, Microsoft, and Alphabet are lined up to report over the next 36 hours. We need a “Meatloaf Trade” at minimum from this three (think “Two Out of Three Ain’t Bad”) for the market to continue its move higher.

Even more, we’re going to need a relatively good outlook from those same companies.

One more number to watch in addition to the S&P 500 at 5,000… The VIX.

The “Fear Index” dropped back below 18 after posting just four closes above that critical level. A move above 18 will get the sellers going again while a move below 15 will pour some fuel on this fire.

About the Author

Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.

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