Rationally Optimistic

Swingly Exposure Status: Moderate Risk

OVERVIEW
Have A Little Faith

Friday would have marked the 8th consecutive day of gains in the major indices. However, the market experienced a slight downturn in trading activity, partly due to nearing a short-term exhaustion point and also lower-than-expected consumer sentiment.

The University of Michigan Consumer Sentiment Index, commonly known as consumer sentiment, gauges the confidence and optimism levels of consumers regarding the economy. Derived from surveys about personal finances, economic expectations, and purchasing plans, this index reflects consumer sentiment.

A higher index value typically signals optimism, while a lower value indicates pessimism. Consumer sentiment is a vital indicator of spending behavior and can impact economic growth.

The latest University of Michigan consumer sentiment survey, released on Friday, revealed a 13% decline in overall sentiment for May. With a reading of 67.4, it marked the lowest level in six months, significantly below economists' expected 76.2.

This is not surprising

In April, the broad markets experienced a notable downtrend, with many major stocks facing rapid sell-offs indicative of a stage 4 decline. Several key macroeconomic indicators during this period pointed towards a challenging time for growth. Gold and the 10-year Treasury note both surged, while the Federal Reserve emphasised that it was premature to consider rate cuts amidst higher-than-expected inflation.

It would have been more shocking to our analysts had we seen a notable surge in consumer sentiment in this latest report last week. We aren’t concerned by the index score and we do suspect next month’s data to be higher as the climate for equities has improved.

Jeff Buchbinder, chief equity strategist at LPL Financial, suggested that the 2-month pause we experienced often bodes well for stocks. He noted that it's typically when the Fed is compelled to cut rates due to economic weakness that stocks tend to decline, a stark contrast with the current situation.

Despite the Federal Reserve's aggressive stance against inflation, which has driven rates to their highest levels in decades, the US economy has displayed remarkable resilience. The labor market remains robust, consumer spending persists, and stocks have consistently reached new levels.

Nasdaq

QQQ VRVP Daily Chart

On Friday's session, the QQQ displayed a doji candle, indicating indecision, after rising above a notable supply zone at $444. It retraced intraday back to its Point of Control (POC) at $442.

The large caps remain significantly extended on the daily timeframe, maintaining their position above the rising 10-EMA. However, they are supported by a substantial cushion of supply/demand, which ideally encourages buyers to intervene and uphold these levels.

While there's a possibility of a brief rest and pullback to $438 before resuming upward momentum later in the week, we don't consider it highly probable.

Volume showed a slight increase on Friday compared to the preceding trading sessions, which is actually an encouraging development. Despite the Nasdaq finishing in the red for the day, it's worth noting that buyers intervened, preventing a more pronounced decline below the Point of Control (POC).

S&P Midcap 400

MDY VRVP Daily Chart

The midcaps are demonstrating that same low seller aggression we discussed with the Nasdaq when looking at Friday’s volume/price profile. The MDY had a retest back to their POC after gapping up above a significant supply/demand level at $550.

Russell 2000

IWM VRVP Daily Chart

In their characteristic high-volatility manner, small caps experienced the most significant price retracement, nearly -1% from their opening price. Despite low volume, the IWM managed to dip below its Point of Control (POC), indicating a likely short-term pause as market participants assimilate these new one-month highs.

We anticipate minimal downward pressure, possibly a retest of the rising daily 10-EMA around $202. Small caps remain comfortably above all key daily and weekly EMAs, instilling confidence in their overall strength.

DAILY FOCUS
Focused On Accumulating

$USHL: US New Highs-New Lows credit: stockcharts.com

Most earnings-based episodic pivots (EP) and breakouts (BO) are proving effective. There's a notable improvement in the follow-through of bullish moves, while bearish moves to the downside show minimal continuation.

The $USHL index has reversed course and is now trending upwards, with both the MACD and $USHL indicating strong bullish momentum.

While we remain in a moderate risk stance and are looking to pursue opportunities to expand our long exposure to stocks meeting our criteria, it's crucial to emphasise that we won’t act recklessly by blindly purchasing any stock in motion. We'll only consider those demonstrating relative strength following the recent March decline.

There remains a strong possibility of a brief near-term retest to the levels we recently surpassed, and the rally lacks significant breadth to propel it to more explosive highs. It's important to recognize that we are still in the early stages of this movement.

WATCHLIST
The Two Standouts

SMCI: Super Mirco Computer, Inc

SMCI Daily Chart

  • SMCI is exhibiting robust resilience, displaying an impressively tight volatility contraction pattern (VCP) following its recent earnings report.

  • Despite an unsuccessful attempt to enter a 0.5R position on Friday, we remain vigilant.

  • Our strategy is focused on patiently awaiting SMCI's breakthrough of the descending resistance level. Upon this anticipated breakout, we plan to seize the opportunity to accumulate a substantial position, maximising our potential gains from the ensuing move.

WULF: TeraWulf Inc.

WULF Daily Chart

  • WULF has been under our radar for several months, especially after forming a year-long base.

  • With earnings approaching on Monday, a robust gap up post a strong report could potentially propel this crypto stock to significant gains in the upcoming cycle.

  • It's essential to acknowledge the inherent volatility and challenges associated with trading crypto-related names. These stocks are heavily influenced by price fluctuations in Bitcoin and Ethereum, both of which are currently in sideways consolidation patterns.

This newsletter does not provide financial advice. It is intended solely for educational purposes and does not constitute investment advice or a recommendation to trade assets or make financial decisions. Please exercise caution and conduct your own research.

Join the conversation

or to participate.