Technical Take on the Market
Investors have been feeling pretty good over the last week as the S&P 500 and other indices have added more than 3% in what appears to be a relief rally.
The relief?
It comes mainly from the soft jobs report on Friday. That number single-handedly put investors right back into one of the most comfortable trades they’ve known over the last six months.
Outside of that, there hasn’t been any driver for the 3-4% rally. As I mentioned on Monday, this was exactly what I expected since there are no high impact earnings or economic data hitting the headlines this week.
Sure, there are results for almost every EV company outside of Tesla (TSLA) this week, but the market has grown to care less about the likes of Rivian (RIVN), Lucid (LCID), and Nikola (NKLA), they’ve figured out that these stocks don’t drive the market. Instead, investors are starting to move into the regional banks and other “forward looking” trades with lower interest rates in mind.
Over the short-term, that may be riskier than thought as inflation data has signaled a slowing of the inflation slowdown – yes, that’s derivative talk for you math nerds – which now has the Fed “on guard.” That “hope trade” may prove bad for the near-term market.
The Hope Trade Is On
Let’s face it, the vast majority of investors are optimists. 
You have to be!
Optimistic investors look at the market and always see the silver lining. They’re always “calling a bottom” and looking for a stock to buy.
It’s not a bad disposition, just one that comes with risks.
Especially when it gets to this level.
This week’s buying has been all about that hope trade. The market trying to get in front of the Fed. Jumping back into a few of the riskier areas of the market. It is notable that there are some stocks, namely the AI related names, that are resisting the urge to move higher.
This is the most dangerous element of this market’s rally. Hope can fade quickly.
What Should You Be Watching for the Next Three Days?
For my money, the most interesting move is in the small-cap index Russell 2000 Index.
The Russell is almost never about “hope,” it’s about speculation. It’s what drives the market higher and lower, not Apple (AAPL) or Microsoft (MSFT). This is the one area of the market where hope takes a back seat to raw speculation.
The Russell 2000 Index is the “tip of the spear” when it comes to the directional moves of stocks.
This is what I’ve seen over the last week in this critical index’s moves.
The Russell 2000 has rallied twice the distance of the S&P 500. This tells us that the market is buying more speculative stocks over those popular blue chips.
Like the other major indices, the Russell 2000 moved back above its 50-day moving but is stalling on its third day. This isn’t enough to call this rally “over,” but you need to be very cautious here.
If the Russell 2000 ETF (IWM) fails to stay above $205 and $200, this market is going to rip the 3% gain that it just gave the hopeful investors out of their pockets and then some.
Keep in mind that the Russell 2000’s largest components are regional banks and retail companies. Reference my comments about the regional banks and the “hope trade” above. Also know that the retail sector kicks off their earnings next week and all signs are that the consumer is a bit distressed.
What About Seasonality?
I’ve had no fewer than 42 people ask or email me about “sell in May.”
Stop.
This saying works because it rhymes… that’s it. Try putting something cute and snazzy together about what investors should do in August and send it to me because that’s the portfolio killer.
The answer lies in the data.
Over the last 20 years – and there’s a reason for this study looking back 20 years, not the life of the market – the “sell in May” rule has given investors a slight edge, nothing huge.
The problem with this “rule” is that this market has turned more into a “trading market” over the last ten years than even this data suggests. In the days of “investing” the rule was more effective, but in a more trade-centric market, missing the timing can cost you 10-15% in no time.
This year the potential for that is higher.
Last week, Calamos Investments made their intentions clear.
There are trillions (with a “T”) of dollars sitting in high-yield money markets and CDs. That money has been amassed there over the last few years as interest rates have climbed to their highs.
The moment that the Fed indicates that they are ready to cut rates – probably sometime over the summer if the inflation data complies – that money is going to start looking for a home in stocks.
The horses are “in the gate” for what could be a huge summer rally. If you’re watching the calendar for November like the “sell in May” rule tells you you’re likely to miss the initial run.
Three Stocks to Watch This Morning
Uber Technology
Uber (UBER) missed their earnings number by $0.54 this morning, despite revenue numbers that were in line. Bookings were lighter than expected as well, an indication that fewer of us are utilizing the rise share service. This may be due to the consumer tightening their spending or competition from Lyft (LYFT).
The stock is trading 8% lower this morning and is threatening to take out the $65 price. A break below $65 will target $60 for Uber stock.
Lyft
Lyft dropped their earnings on the market last night and the numbers were good.
The ride sharing company beat earnings per share (EPS) expectations by $0.09 on strong revenue results. Revenue from the quarter grew by 30% from this time last year. That compares to Uber’s growth for the same period of 14.8% which was lower than Uber’s previous quarter.
Bottom line, going by the numbers Lyft is taking shares from Uber with their recent investments into technologies for drivers.
The stock is breaking above its bullish 50-day moving average in early trading as it targets a move to $20 (15% gains from here).
The company’s first official earnings report beat by $0.56 and beat on revenue.
Management guides second quarter revenue above The Street’s expectations, news to the market’s ears.
This is the report that Reddit (RDDT) needed to raise some conviction among investors that may have thought the company’s IPO was nothing more than smoke and mirrors. The stock gets one nod from the analyst community as Needham confirms their Buy recommendation on the stock and raises their price target from $55 to $63. That’s the highest target on Wall Street as of now.
Shares are at $56 with a technical target of $65 from my perspective.
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.