The Momentum Trade That’s Taking The Entire Market Up With It

This column is my opinion and expresses my views. Those views can change at a moments notice when the market changes. I am not right all the time and I do not expect to be. I disclose all my positions clearly listed on the page, and I do not trade my account on the stocks spoken of in this column unless fully disclosed. If that does not work for you stop reading and close the page. Do not bother me or harass me.

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May 9, 2020

Stocks: TWLO, ETSY, STMP, W

Macro: SPY, XWEB

Long-Term Market Trends – Caution

Michael Kramer and the clients of Mott Capital own MSFT and GOOGL

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Stocks continue to defy logic from a fundamental standpoint, but as we all know, fundamentals do not always drive price action. While many investors continue to be “confused” by the current price action, it may not be as confusing as it seems. 

Many investors seem to think that market is trading with a premise that the worst is behind us, and to some degree, the worst may be behind. But they’re still plenty of unknowns left, that I think even the most bullish investors would have a tough time answering. 

Fed Balance Sheet 

The belief that the Fed is pumping the market is fundamentally false. The Fed’s bond purchases, although large have subsided in recent weeks, and based on this week’s schedule will continue to recede. 

fed balance sheet

The Fed is creating money out of thin air, but the only problem is that it is merely sitting in on the balance sheets of the banks at the Fed, as noted by excess reserves, for which the Fed pays interest. 

excess

Regardless, the market is recovery for the most appears to be contained to most technology-based companies that lie in the NASDAQ 100. The index has easily outperformed the others by quite a bit. So when we talk about the market, we need to start thinking about the market and the “market.” The Internet ETF XWEB has returned to its 2020 highs and now has an RSI of over 70, meaning it is overbought. Could it continue to become more overbought,  of course, I don’t have to tell you that.

But the ETF is now also approaching a resistance zone between $89 to $91. If the index can break out, then there is no stopping the rally higher. If the ETF fills the gap and is also in the final stages of the rising wedge pattern, then perhaps it may have quite a distance to fall.  The $91 level may be a healthy level of resistance for the ETF because it has been firm since the beginning of 2019.

web etf

Stamps.com (STMP)

Stamps.com is the most significant stock by weighting in the ETF. The stock is trading with an RSI over 80 and completed a gap fill at around $205. 

stamps, stmp

Wayfair (W)

Meanwhile, Wayfair is the second-largest stock in the ETF and is also trading with an RSI well north of 80. Meanwhile, it has a massive gap to fill down to $122.

ETSY (ETSY)

Then there is ETSY, which is trading at an all-time high with an RSI over 70 and forming a bearish divergence.

etsy, etsy

Twilio (TWLO)

Twilio is also trading with an RSI over 80, and a giant gap to fill at $122.

But Mike, these stocks are small and admittedly ye ole Stamps.com with a $3.5 billion market cap isn’t moving the entire stock market. Well, of course not, but when the whole group is going up, and Amazon, Facebook, Alphabet, are being dragged along with the group, well then, the story changes. When 3 of the 5 largest stocks go up, they drag the entire market higher. 

Throw in a hot software sector that has Microsoft, and that is what you get. So, it will be interesting to see what happens as some of these stocks that are stretched technically turn lower. They will likely turn at some point, and based on some of there recent moves, probably sooner than later. 

Don’t get me wrong I own Microsoft and Alphabet, so I’m more than happy the group is rising. Anyway, again, I’m not trying to be and doom and gloom, I am merely trying to point some of the risks that exist currently, and not to be surprised if we get a sharp pullback sooner than later. 

-Mike

Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.  

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