Stock Market Prep – Fear is Back, But So is FOMO

Despite last week’s 3.5% rally in the NASDAQ, you might be surprised to learn that investor sentiment is actually fearful, as most stocks fell. We have once again returned to a very narrow rally in the stock market, where only a few stocks are rising, while most stocks fall. Despite the ongoing FOMO in mega-cap tech stocks, especially Nvidia, the fact that most stocks in the market are falling should be a warning sign to everybody.

Regardless of what direction the market takes this week, one of the most successful traders in the world, Ace of Trades, is planning on turning $2,000 into $10,000 over the next 1 to 3 months. He’s successfully completed 90% of these Small Account Challenges, so based upon history, anybody who copies his trades should have a 90% chance of seeing a 5X gain in their portfolio also. Details on this challenge are at the bottom of this newsletter.

Last Week Recap

While most eyes were on the 3.5% rally in the NASDAQ, led largely by a 9% rally in Nvidia, many people missed the fact that the DOW fell 0.5% and the Russell 2000 fell 1%. In fact, most stocks in the stock market were down last week. Thanks to the heavy weighting of stocks like Nvidia in the NASDAQ and S&P 500, as those stocks rallied, it brought up the NASDAQ and S&P despite most stocks in those indexes finishing the week in the red.

Last week’s narrow rally caused some to fear that this year’s market rally might be coming to an end. I’ll talk more about this in the market sentiment section of this newsletter. For now, just know that valuations on the mega-cap tech stocks are extremely high, with many of those stocks trading at double their historical fair valuations. If bears are right, and this year’s rally is ending, we could be looking at a 50% decline or more on the mega-cap tech stocks.

One thing the market still doesn’t seem to be pricing in is the Federal Reserve’s “higher for longer” stance that remains. Last week’s FOMC meeting held this view despite the CPI inflation data coming in lower than expected. The Federal Reserve appears to be in no hurry to lower interest rates anytime soon, and hinted at only 1 rate cut this year, possibly in December.

The market is still pricing in the soft-land scenario, and is giving no consideration to a possible recession. Despite GDP slowing down considerably, the labor market showed stronger than expected gains in employment, which deepened the belief that inflation would return to 2% without a recession. Investors need to keep in mind that data can fluctuate from month to month, and it’s the trends that investors need to keep their eye on. That’s why no one data point has yet to change the Fed’s “higher for longer” stance.

Market Sentiment

The CNN Fear and Greed Index (https://www.cnn.com/markets/fear-and-greed) closed deep in the Fear stage at 38. This was mostly due to the fact that most stocks in the stock market fell last week. Stock Price Strength and Stock Price Breadth both finished the week in Extreme Fear. Market Momentum of course finished in Extreme Greed as the overall S&P 500 index rose again last week thanks to the mega-cap tech stocks.

Options traders are a bit mixed though. While the put/call ratio is in Extreme Greed, indicating options traders expect the rally to continue, market volatility, defined by the VIX, finished in the Neutral stage as S&P 500 options traders start to become worried that an end to the rally might be coming soon.

The VIX rose 3.6% last week to close at 12.66. The VIX only closed higher than that once in the past 6 weeks. Despite the rise in the VIX last week, the VIX remains in the bullish stage. So while S&P 500 options traders might be getting a little less bullish, they’re not bearish yet. That means that even though this year’s rally might be coming to an end soon, it’s not necessarily going to happen this week. We could still be looking at another 1 to 2 weeks or rallying before the party ends.

Technical Analysis

The daily technicals are very strong, but in bi-polar directions. Both the DOW and Russell 2000 are 100% bearish, while the S&P 500 and NASDAQ are 100% bullish. This is due entirely to the heavy weighting of the mega-cap stocks, especially Nvidia, in the S&P 500 and NASDAQ.

The daily technicals are showing us the same thing Market Sentiment is showing us. While most of the stock market falls, FOMO remains very strong in the mega-cap tech stocks. Investors continue to pile in to mega-cap tech stocks, buying only because they think the price will continue to rise. These FOMO rallies can last for years, but when they eventually end, the pain can be tremendous.

The fact that most stocks in the stock market are selling off right now, means there’s a good chance that FOMO could end in the mega-cap tech stocks at any moment. Of course timing this is impossible. The technicals, as well as market momentum suggest FOMO buying will continue for now, at least for this week.

Technically there is some resistance coming up that might end the rally. The S&P 500 hit the 161.8% Fibonacci Retracement level last week (from the 2021 highs to the 2022 lows). While this seems to have stalled the rally, it also left a gap on Wednesday that has yet to be filled. The NASDAQ on the other hand, still has another 2% to rise before it hits the 161.8% Fibonacci Retracement level. This means we could see another 2% rise in the NASDAQ before the rally ends.

The weekly technicals finally turned 100% bullish on the S&P 500 and NASDAQ 100, although they remain mostly bearish on the DOW and Russell 2000. My analysis on the daily technicals applies to the weekly technicals as well, as the daily technicals almost 100% line up with the weekly technicals.

Economic News

This week is going to be full of Federal Reserve speakers, with not a lot of other major economic news to move the markets, outside of a few day trading opportunities. Most of the Fed speakers are speaking on Monday and Tuesday. So far, the Fed speakers have been hawkish, indicating no hurry to lower interest rates. That could cause the DOW and Russell 2000 to fall further on Monday and Tuesday as these Fed speakers give their remarks.

Day traders will want to pay attention to the economic calendar though, as quite a few smaller announcements could move the markets between 8:30am and 10:00am each day this week.

Here’s the full list of all of the economic news coming out this week as well as the time each report is being released: https://www.marketwatch.com/economy-politics/calendar

Here’s what time each Fed member is speaking this week: https://www.federalreserve.gov/newsevents/calendar.htm

Earnings

Only a few companies are reporting earnings this week. While none of the companies reporting are major companies, many of them will provide insight into how retail consumers are spending. If the narrative among these companies is conclusive, with either more consumer spending than expected, or less consumer spending than expected, these earnings could collectively cause the market to move. But if the earnings are mixed, the overall effect on the stock market should be minimal.

Crypto

Bitcoin failed to break above the $72,000 resistance level and is now in a downtrend. I sold my crypto mining stocks last week for a profit, but still hold on to hope that Bitcoin will rise once again. For now we just have to watch and wait. Bitcoin is not near any major support or resistance levels right now, and with it in a technical downtrend, we might be looking at another 1 to 2 weeks of falling before Bitcoin bottoms out..

Other Things to Know