Word is going around that this rally is unsustainable when looking at AI stocks because the leader, Nvidia, is failing to hold highs. The problem with that is the stock will soon be heading in a straight line up to 300. Nvidia has dominated the sector which recently has branched off to the other stocks like Intel and Advanced Micro Devices. The ones taking current price action as a red flag are too blind to see what’s coming.
The market is pricing in a clear distinction that this is a risk-on environment. So much so that we have stocks like INTC and SNDK quadrupling in under a year. All I can picture is a crowd of buyers fighting eachother in line to buy stocks. We must not look at this from a perspective of when will this end. Shift your thinking into what will be the next big winner in this cycle. Remember, it’s okay to miss a large move in a stock as there will be plenty of other opportunities to catch another one.
We are in perfect environment to have many large moves born.
The next leg higher must begin with AAPL, MSFT, and NVDA. To keep these high prices on the S&P we need to see broader rallying in the mega caps.
Typically, we see the largest tech companies rallying in waves rather than simultaneously. One month AAPL could rally 10% while Microsoft is flat or even negative. This is what I mean by the market will move in waves from one stock/ sector to the next. As long as the majority of the largest weighted stocks are rising, the index will follow.
Turn your attention to the nine highest weighted stocks in the S&P:
All of these stocks combined bring in a net weight of roughly 39% of the entire S&P index. Let’s create an example out of this just to show how much the high percentages matter.
If 39% of the market is on average up +5% for the month and the rest of the market is flat. The S&P will be up around 2% for the month even though the rest of the market has done nothing.
Let’s change this up and say the 39% is up 5% but the other 61% is actually down 2%. Then the overall change on the S&P will still be positive at +0.70%.
Paying attention to the top weighted stocks is extremely important as they can dictate which direction the market is going while the majority of stocks are doing the opposite. Take this information and think what will happen if AAPL, MSFT, and NVDA, begin rallying. All of these stocks are relatively lagging recently and are on standby to drift the market higher. When looking at the current setups on the three stocks, NVDA and AAPL are the two that are currently in an uptrend. Microsoft has been in a downtrend for 21 weeks and is down -15%. Stick with what’s currently working rather fighting with what’s not.
We can use examples from the past few weeks as examples. To start off, let’s look at the Healthcare sector which we called out JNJ and MRK longs. While these trades didn’t end up working in our favor, we cut them as soon as the long setup was invalidated. Both of these stocks showed momentum to the upside with weekly closes over the 10 and 21-week EMA. Unfortunately this took a turn this week which saw a weekly close below both EMA’s. This was our sign to take these trades off and wait for price to regain strength above the 10-week EMA.
Many traders will find themselves being attached to positions and completely disregarding invalidation points. The same can apply in regards to taking profit.
JNJ
JNJ we called on longs based on price retracing to the key support level (21-week EMA). Price closed just above this support two weeks ago which validated a dip buy opportunity. The thesis for this stock was sent out inside the weekly letter:
This ultimately finished being a loser with contracts dropping -25%.
MRK
MRK had the exact same setup which ended up being -12.94%. You can see the setup sent to subscribers here:
High quality setups on these two stocks that resulted in being a fakeout.
MNST
One stock that has taken the market by storm was MNST. The company reported robust earnings sending the stock up 13% on Friday. Take a look at what we called on for this stock which has contracts already up over 100%:
In a single session these contracts doubled and have over 220 days until expiration. This paves the way for strong continuation up to 100 which will make this trade a potential 3x.
These were the main moves that needed to be noted as we wait for the other stocks in the list to continue higher. Now our focus will move into the stocks setting up large moves for the weeks and months to come.
