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It was a pretty quiet week until Friday. Trade tensions with China are soaring again, and it sent stocks tumbling into the close. Could we really see 100% tariffs on China? I think it's an exaggeration, and the best dip buying opportunity in months. Be ready. The Dow Jones Industrial Average led the selling lower, finishing down 2.73% on the week. The S&P 500 was down 2.43% while the Nasdaq was off 2.53%. Gold and silver both hit new all-time highs last week, while bonds saw a solid bid come through. Crude oil is getting crushed and it looks like we're setting up for a great buying opportunity in crypto again.
Artificial Intelligence. Nuclear. Quantum. Crypto. The world is changing faster than ever, and the markets are reflecting these incredible opportunities left and right. I see so much anger towards the "bubbly" price action of some of these names, but if you manage risk properly, they really offer the best opportunities to make money.
I completely understand and sympathize with the fact that the valuations in many of these companies are outrageous. Many of them don't even have revenue or earnings. But my honest response to that? So what.
Markets don't move based on facts, reason, or common sense. The sooner you accept this truth, the faster your trading results will improve. Markets move based on emotions – fear, greed, euphoria, panic. We've seen this time and time again throughout history. Manage risk properly so you can make those mini-fortunes in bubbles.
It was a bit of a battle between risk-on and risk-off sectors last week. Tech (NYSE:XLK) and utilities (NYSE:XLU) were neck and neck, but how much of the utility landscape is rising now due to growth from AI versus economic slowdown concerns?
By far and away, we still see the tech sector (XLK) as the top-performer since the April 7 low. This, in of itself, is very bullish. We're talking about a 25% point spread between tech and the second-best performer in communications (NYSE:XLC). This is huge.
Meanwhile, all of the defensively-oriented sectors like consumer staples (NYSE:XLP) and healthcare (NYSE:XLV) are still hanging out near the bottom of the pack. Let stocks chop around some in the coming days to see if the growth sectors can regain some momentum.
| 1 week | 3 Weeks | 13 Weeks | 26 Weeks |
| Utilities | Utilities | Utilities | Technology |
Editor's Note: Near-term pain. Long-term gain
It's time to check back in on perhaps the most important ratio for this entire AI-driven bull market right now. We're looking at the chart between semiconductors (NYSE:SMH) and the Nasdaq 100 (NYSE:QQQ).
The AI revolution is being powered by semiconductors, so it makes total logical sense that we would look for SMH to outperform QQQ as an indicator that the state of the AI trade is in solid health.
I'm now tracking the mega wedge pattern on this ratio chart. This points to yet another round of accelerating upside momentum in this ratio, if and when it breaks above the upper trendline of the pattern. This means there's still money to be made in the chip trade.
European markets have been all the rage this year, as international stocks finally got a taste of the action that U.S. markets have been experiencing for the past decade and a half. But now, as we are in the early stages of Q4, will Europe still be the world's hot market?
I'm looking at the ratio between European stocks (NYSE:VGK) and emerging markets (NYSE:EEM) below. Since May, emerging markets have actually outperformed European stocks by a fairly wide margin, and we could just be getting started.
I'm keeping a close watch on this developing rounding top formation. We're testing support now, and if it breaks, then the odds of a massive shift away from European stocks into emerging markets is only going to accelerate. This ties into our China bull thesis going forward too, since EEM has a lot of exposure to China.
For all the fuss out there about stocks being overvalued, and how the next financial crisis is right around the corner, we're seeing quite a bit of stability in the bond market. I'm looking at the spreads between junk bonds (NYSE:HYG) and 3-7 Year Treasuries (NYSE:IEI) this week.
This ratio provides a key way to measure the market's liquidity conditions. Basically, if junk bonds keep outperforming Treasuries, and this ratio is climbing, then all is well in liquidity land. The opposite is also true – if this ratio is falling – seek some sort of protection.
Currently, it looks like liquidity conditions are about to improve even more. The ratio is hanging out around resistance of a massive saucer formation. If and when it clears, look for market drops to become even more boring.
At the end of the day, the bond market is going to tell you a lot more about the health of the overall market compared to some random pundit online. It seems that every other day, there is a warning of an imminent popping of the AI bubble, but ratios like these simply don't support it.
Junk bonds trade like stocks. If liquidity issues arise, they're the first that get hit within the bond complex. In other words, as long as you seem them continuing to rise, keep tuning out the noise and focus on what the market is saying.
I want to pivot a bit this week and go back to looking at Bitcoin. It's been a while since we looked at the legacy cryptocurrency, but it's fresh off of new all-time highs, which confirms to us that the trend is still very much in favor of the bulls.
I'm keeping a very close watch on a new bullish technical development. Another wedge pattern has formed on the daily chart for Bitcoin, and prices are consolidating just under resistance. A break above there would open the door for another leg higher in the bull market.
The pattern is projecting a rally up to the 138,000-140,000 zone, but we'll need to see a decisive close above 124,000-125,000 first. The path of least resistance in Bitcoin remains higher so long as prices hold above 110,000-112,000.
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Posted In: EEM HYG IEI MNMD QQQ SERV SMH VGK VSAT XLC XLK XLP XLU XLV
