This Is Not a Bull, This Is a Rocket Ship!
Seasonality favored the SPX, NDX and DJI during the first week of July in a context of a low percentage of stocks fueling the rally.
During the second half of 2021, the market had been soaring for over a year without meaningful pullbacks. Reversal setups were quickly bought, and my account balance kept climbing. People I had told in 2017 that investing in stocks was a good idea, and who didn't listen then, were suddenly interested at the end of 2021. They told me which stocks they bought based on news – I remember how popular TSLA was. Bollinger bands and resistance zones were meaningless for Tesla.
In the second half of 2021 potential reversal candles were invalidated, Bollinger bands were jumped frequently (not as now by the way), RSI lasted overbought for long while breadth was deteriorating.
Remember to read the third installment of market breadth when 2021 was analyzed:
There were pullbacks in September and November, but I nailed the bottoms by accelerating my account with leveraged ETFs for SPX and QQQ; I was getting used to seeing some days when my account increased by five figures (10K to 20K). December 2021 was a rocky month with long weekly candles; a green week followed by a red one, then another green one. Since the pullbacks were quickly bought, a 10K decline in an account was quickly recovered. The complacency level was high. After all, this was almost a two-year nonstop rally with high liquidity levels in the market, tops were meaningless, a new ATH came every week and suggesting that technicals were overheated was unpopular.
In January 2022, the days with significant declines became more constant; I still remember the third week of January: One, two, three, and the usual bounce didn't come. The overheated technicals were finally charging their toll, and in just two months, half of the 2021 gains had been erased. People who bought in the TSLA hype lost capital.
First learning for me: Always keep the radar on and be mindful when technicals are overheated; even if that is unpopular.
I was all in cash starting in March, then loaded back on March 16th for a swing that I closed beautifully on March 29th. A good portion of the lost gains from 2021 was recovered.
Then I listened to the statistical experts about April and I bought back because April was supposed to be a very bullish month. It was a “no-brainer move in an oversold market”... well, I jumped out on April 14th and went to have dinner with my wife, very disappointed for not following my technical setup but listening to the "statistical approach" instead.
Second learning for me: Be disciplined with your technical approach, Statistics will always give you a 70% to 80% probability of gains, that is not a big deal for a pivot table in excel with all the SPX history, that is simply the stock market.
Long story short, from the 2021 gains, half were preserved. It wasn't a bad outcome, but not the best one either, and I was emotionally affected, as you can imagine since I missed gains on moves I could have anticipated.
Then the “I could have” thoughts come, and they’re hard to overcome even when you manage a good portfolio and have solid technical knowledge. Today I’m doing the opposite in a progressive way: deleveraging; and that is not an investment advice, I’m sharing my experience and how I can build on that.
Key Message
The market is overheated. Technicals are a function of price and time, and there's nothing wrong with the current price levels, but the time it took the indexes to reach them is concerning. When technicals pass the bill, it comes quickly, and complacency is usually there until it's too late.
Complacency can fool you when the decline comes, I managed very well the 2018 bear market since price followed technical levels during 2017 and even the first half of 2018, but the intensity of 2023-2024 can make you doubt when a top is in formation as it happened in 2021.
Worth noting: NVDA is not TSLA; there are solid fundamentals for the former, but it has exceeded them since a month ago.
Also a relevant note: A bear market like 2022 is not what I expect, but I want to be prepared if a correction like the one seen between August to October 2023.
There are extreme divergences that didn't exist in 2021. Breadth is extremely weak. To put things in perspective, see the following chart that shows historical lows of the percentage of stocks listed in the S&P 500 that are beating the index.
To further illustrate the market's weakness, the ratio between the S&P 500 (which already has weak breadth) and the Russell 2000 is historically low. This means that the underperformance of small-cap stocks compared to the S&P 500 has been extreme so far in 2024.
Be mindful of the current context, this is not a market to short, but it is a market that will pass the bill sooner or later; and people who did not buy NVDA in November 2023 are capitulating thinking this is the dip; people who bought Bitcoin a month ago maybe capitulated on Friday in the middle of a local bottom, and people who did not but TSLA when it was cheap as anticipated two months ago, they may be considering a buy today. That’s human psychology and that’s the worst enemy for trading.
Before closing this introduction, let me share the link for the latest S/R levels, the intro for the previous publication had more references of how this market is unique; and given my experience, concerning unique:
https://smartreversals.substack.com/p/special-notes-about-the-week-that
Stay disciplined, and let me share you the third learning that improved my trading after the rocky 2022 experience that followed the “invincible” run of 2021: