Larry’s Note: Today at 2 p.m. ET, I’ll reveal what I believe is the single biggest short-term opportunity in today’s broken market – a repeatable trade I’ve used to pull gains of 100%+ in 24 hours or less.
I call this kind of setup a “Market Divergence.”
And if you’ve been watching what’s happening lately – irrational rallies, conflicting data, retail piling in while institutions quietly back out – you know something isn’t right.
But for traders who know what to look for… This chaos creates fast-moving setups. So I’ll share how you can target quick profits in this environment.
Go here to RSVP with one click for the airing this afternoon.
Volatility is slowly coming back to the stock market.
After 69 consecutive days trading above its 20-day moving average (MA), the Nasdaq-100 made a sharp drop below its short-term MA last week.
That came on the heels of a big threat to the stock market. Evidence points to the arrival of stagflation. Stagflation is when the economy is weakening but inflation runs higher nonetheless.
Last week featured higher-than-expected inflation and a surprisingly bad labor market report. And the stagflation threat could be magnified since stocks are currently priced for perfection.
So let’s look at why stagflation poses a dual threat to the stock market… and why the Nasdaq-100 is flashing warning signals of a reversal lower.
Stagflation’s Market Risk
Mega-cap technology shares are setting huge milestones this year.
Both Nvidia (NVDA) and Microsoft (MSFT) joined the $4 trillion market capitalization club. Other tech shares are seeing their valuations surge as well.
That’s driving major indexes like the S&P 500 and Nasdaq-100 to record highs in the aftermath of the April sell-off.
But the rally is also leaving stock indexes exposed if things don’t play out just right.
Valuations are rising into the stratosphere on hopes that future corporate earnings justify buying at such elevated levels.
Based on expected earnings over the coming year, the technology sector has a price-to-earnings (P/E) ratio of 28.9. That’s 57% above the 20-year average.
As I mentioned above, stocks are priced for perfection, especially in the tech sector. But evidence of stagflation could impact valuations in two ways.
First, valuation bubbles are built on the hope that earnings down the road justify buying stocks at these nosebleed levels. Nothing deflates a bubble faster than investors calling that into question.
Second, stock market valuations feel the bite of high interest rates. A higher interest rate makes the present value of future earnings worth less. That’s especially the case with high-growth stocks, whose earnings potential won’t come to fruition for a long time – potentially years.
It’s hard to know exactly when investors will take notice and start to care about these stagflation threats.
But signs of a short-term reversal in the Invesco QQQ Trust, Series 1 (QQQ) – an ETF that tracks the Nasdaq-100 – hint that stagflation is starting to matter…
|
Tune in to Trading With Larry Live Each week, Market Wizard Larry Benedict goes live to share his thoughts on what’s impacting the markets. Whether you’re a novice or expert trader, you won’t want to miss Larry’s insights and analysis. Even better, it’s free to watch. Simply visit us on YouTube at 8:30 a.m. ET, Monday through Thursday, to catch the latest. |
A Short-Term Reversal Pattern
Just as stagflation risks are rising, key signs of a trend reversal appeared in QQQ last week.
The bears were starting to gain the upper hand before QQQ dropped below the 20-day moving average.
Take a look at the QQQ chart below:
QQQ’s price action completed a bearish engulfing pattern (arrow). That’s when the daily price bar makes a new high relative to the prior day’s bar… But then it reverses lower and takes out the prior day’s low.
It’s a short-term signal on the daily chart. But it shows momentum shifting toward the bears.
That was followed by a drop below the 20-day MA (blue line) after last week’s abysmal payrolls report.
And this is where you can watch for the next bearish signal. As I said, the pullback happened on a gap lower following the payrolls report on Friday.
Prices rallied sharply on Monday earlier this week, making investors think the worst was over.
Instead, the QQQ rally simply “filled the gap” left from Friday’s price action. Filling the gap is pretty common, but QQQ is now struggling to sustain more upside.
As traders, that gives us a near-term price level to monitor. If QQQ struggles to recapture the 20-day MA (blue line) and takes out the Friday low at $551, then we can expect more downside ahead.
That could be a clue that investors are starting to care about stagflation’s impact…
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
|
Free Trading Resources Have you checked out Larry’s free trading resources on his website? It contains a full trading glossary to help kickstart your trading career – at zero cost to you. Just click here to check it out. |