Market review 23.06.18
Simplify, a potential pullback, focus areas, and Fintwit wisdom.
We had a nice run over the past several weeks. Naturally, there are two questions now:
Do we get a pullback?
What are the most attractive areas going forward?
Before diving into the above, I want to discuss an important topic.
“Simple can be harder than complex: You have to work hard to get your thinking clean to make it simple. But it’s worth it in the end because once you get there, you can move mountains.” – Steve Jobs.
There’s an overwhelming number of areas in this market. You can get worn out by analyzing every aspect of it. And you can get run over by reacting to every blip.
We already know to avoid the news, opinions, fundamentals, etc. We also learn to simplify our price charts: use longer timeframes to see the big trends and horizontal lines to reduce bias.
But it’s also important to simplify what segments of the market we study:
Asset classes: Equities are where the big trends are right now – focus there. Rates & currencies had big trends in prior years (with important implications for stocks), but I believe they have become a big distraction at this point. Price action has been saying that growth stocks have especially been responding to commodities rather than rates.
Global regions: While it’s cool to see small countries like Argentina, Turkey, and Greece outperforming this year, we can simplify by looking at big countries and regions. This includes the US, Europe, Japan, Canada, Asia, and LatAm. Simply assessing US vs. non-US can tell us a lot.
Sectors: Even the 11 US sectors can be simplified into growth and value. Growth sectors (tech, consumer discretionary) have been leading this year, while value sectors (financials, energy, health care) have been lagging. Last year, it was the opposite.
I’ll discuss why US growth stocks should remain a focus in this bull market despite some short-term hurdles.
On a pullback
The powerful QQQ had a 20% rally early in the year before it had a healthy pause. It’s had another 20% rally in recent weeks:
This “measured move” can sometimes indicate a pause. But a stronger case for a pullback is that many indices and ETFs are now at clearly defined resistance.
We looked at the Arca Computer Hardware Index (HWI) 4 weeks ago when it made a clean breakout. Now it’s near resistance:
Similarly, the strong SMH ETF is at resistance. So too, are EWJ and others.
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