Rallying From S&P's 3800 Support Level Reveals The Bear Is Going On Summer Holiday - What's Next



  • Friday's Rally is Significant, it signals the bottoming process.
  • Market participants will be hunting for signs of lower inflation but we have perhaps even a month of a rally up to the June FOMC.
  • This does not mean we won't see a retest of the lows, especially if this rally goes so far as to be overbought going into June CPI.
  • I will continue to build my position in the mega-cap techs but spreading to the next tier of tech names.
  • I will be keeping a closer eye on the 10-year and the VIX. The 10-Year needs to stay below its recent high, and optimally under 3%. The VIX needs to continue to fall to make this rally sustainable for the next several weeks.
  • This idea was discussed in more depth with members of my private investing community, Dual Mind Research. Learn More »
Two teddy bears sitting sea view. Love and relationship concept. Beautiful white sandy beach in the summer.

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I admit my last few articles trying to call the market turn was a messy endeavor

Once again I falter, more than a few of you are probably wondering, why do I do this? I am bound to have an embarrassing failure. The truth is, I am actually pretty good at calling the market. It’s just when I fail it usually happens in spectacular fashion. Still, that doesn’t answer the question. I could be like most of the financial media and either be a Permabear, or I could use this ever-popular non-committal pronouncement; “cautiously optimistic”, which basically means nothing. No, I do it because, this is what every trader and active investor tries to do and wants to know. The whole reason I started writing about the market, is to document what I am thinking. I do this in an almost chronicle or “dear diary” style, in order to have a more disciplined approach to my trading. In the course of recording what I am thinking about a stock or a sector that I'm actually buying or thinking about buying, I think my readers derive a value as well. So, it’s worth it to me to embarrass myself, with (hopefully) a rare face-plant, if it makes me a better trader. By doing that, I hope it informs you in an entertaining way. It’s fun to let you all crawl into my cranium with me as I puzzle through what the market is doing. Then decide how to react to it, while at the same time selecting great stocks that are about to fly. Or in this current year, will hopefully do so once the market stops having fits.

Wasn’t Friday just another bear market rally? It could be, but I don’t think so

Why do I say that? Well, for one this past week all the best tech names finally started selling off in the same precipitous fashion as other tech names. In the last throes of a bearish sell-off, a corrective phase begins when there is no place left to hide. Friday, we saw the 10-Year sell-off, and equities, even the safest ones sell-off. It was clear that we ran out of sellers. Also last week we had quite a number of rally attempts that ended in failure. I’d like to point out that the more frequent the rallies the less it seems like a bear market rally. Once the 3800 level was held we saw higher lows. At that point, it didn’t take much to ignite a really sharp rebound that ended nearly at the highs during the market close. Thursday, we had 90% of the volume on the negative side, and Friday we had a strong percentage volume on the positive side. Again, this seems to show capitulation and a rejection of the selling panic. Yes, there was a palpable sense of panic in the market, as people sold out stocks at prices, they would not think possible merely ten trading days ago.

Why is this the bottom, you were wrong last week, why should we believe you now?

I am not asking you to believe, also we are likely to test that 3800 level one more time. So, to put a finer point on it, we are in a “bottoming process”, I should have been more careful with my words, or maybe thought it through better. Since the 4th quarter of last year, the market has been discounting and discounting the enormous gains in technology and other growth names. Powell and his merry band of regional bank presidents ratcheted up the hawkish rhetoric more and more. Powell announced that he wanted to be the second coming of Paul Volker to help stamp out the evils of inflation. No one had any doubts that Powell was ratcheting up interest rate expectations. He managed with just one quarter-point raise to get the 10-Year already running up a hundred basis points. Then just 2 weeks ago Jay Powell stated that as of right now .75% wasn’t necessary. Last week he raised a half-point, the inflation hawks were disappointed, but the market took note that this was the first half-point rise in decades. Finally, the CPI number was higher than expected which was supposed to be 8.1% though for the first time in more than a year it was lower than the previous month. In fact, The Labor Department’s consumer-price index reading last month marked the first drop for inflation at 8.3% in eight months, down from an 8.5% annual rate in March. That’s when the market really tried to sell down, but the juice was already squeezed out, and all the discounting was done. So the rally ensued, frankly, I was expecting it to fade into the close but that didn't happen. I am not covering my bases by saying that we are still in for choppy trading, I know I will be watching the 10-year movements and the VIX. If both continue to fall as I expect more people will rush into the market until it is once again overbought, and that is when the lows will be tested to see if the bottom is in for real.

Monday could be very messy as the short covering is likely over and fast money traders that went long Thursday and Friday morning will want to claim their alpha. Unless the bulls make a convincing case that this is the rally. I would buy a sell-off if Monday opens down, and hold off doing anything if it opens strongly to the upside. Either way, I would not be surprised to have both sides be victorious tomorrow and even Tuesday. Unless as I said the VIX weakens further if that is combined with a 10-year that stays under 3% hold on to your hats… I know that Dual Mind Research will be following those indicators and the others we have identified to get a jump on where the market is going.

My Trades

Let’s get this out of the way first, I sold off a substantial amount of Upstart (UPST) shares at a substantial loss. I put the cash into more Amazon (AMZN) and Alphabet (GOOGL) shares. Once I saw that UPST bottomed I started buying it back. After much review and study, I am still convinced that it is one of my best ideas in a long time. Every company destined for greatness had trying episodes like this, AMZN, Meta (FB), and many others had reported changes that the analysts were not ready to offer a benefit of the doubt to. By now most of you are familiar with what happened, and I spoke about it as well. Here I am merely reiterating that I am now building back my shares at a lower cost basis than I have had since the IPO. At some point, UPST will likely consolidate its gains and I will trim off the more expensive shares, and repeat the process pushing down my average price and gaining more shares. I also closed out my UPST Calls which ended up with a diminished principle that was less than the price of a speeding ticket.

I said I was going to close out my DWAC calls and short the shares instead. It turns out that DWAC shares are difficult to borrow and they assigned me a usurious rate of 73%. That’s right, I probably could get better rates with the local loan shark. Good thing I started with just 10 shares, and instead put the Calls back on.

I am still short the SQQQ which means I am long the TQQQ. This tactic is Serop’s idea and I love it. Leveraged ETFs are not supposed to be long-term positions because of decay, with this tactic you turn that decay on its head and make it easier to hold on to.

I am building up positions in these re-opening plays that haven’t been elevated by the market as yet. Live Nation (LYV), and Expedia (EXPE) are invested in both Calls and Equity, the third is ABNB which is only shares right now, but I may put on Calls as well.

As I reduce some of my Oil names, I may replace some with Calls. I say this because if the overall market is ready to run up, maybe WTI breaks through 115 and boosts all the EnP names and refiners. I already have some Ring Energy (REI) and Kosmos (KOS) call options just to start.

I got right back into the Fertilizers through shares in Mosaic (MOS) and Intrepid Potash (IPI). I had some nice calls but I closed them out and held just the equity in both. If the market starts tomorrow in the red, I will want to buy more MOS and IPI. Also, there are several others that I am mulling over within the Dual Mind Community. I will let you know next week whether I added new names to the Ag sector.

I still favor the cloud software names

I will continue adding to Microsoft (MSFT), and then the next lower tier of tech stocks like Snowflake (SNOW) that I bought late Friday, as well as Adobe (ADBE), and Intuit (INTU). I got back into Affirm (AFRM) I really respect Max Levchin the CEO and when he blew away earnings, I just had to get in again. I’m completely out of PayPal (PYPL), I thought it bottomed, I got out this past Monday and I was glad to be just a witness and not an owner to see its share price melting away. At this point, they should bounce the CEO for not executing. I bet they’ll get activist investors in there and shake things up. I also sold off Twilio (TWLO) in order to buy GOOGL That’s not to say TWLO won’t fly right now, but GOOGL will fly too, and they split 1 to 20, I want to be an owner when it does. I have not given up on TWLO I just want to raise the quality of my portfolio when I can. I bought back Meta (FB) in albeit a tiny position, and I will try to add to it if it falls anytime this week, otherwise, I would rather use it to build up GOOGL. I started building back my MP Materials (MP), I sold it at 55, and now buying in the 30s again.

Let’s Talk About Chips

Right now I only have Advanced Micro Devices (AMD), I think the Chips has the potential to lead this tech rally alongside the cloud software names. Look at how devastated NVIDIA (NVDA) is, also Micron (MU), or Marvell (MRVL). Right now, I am very seriously considering MU, it’s very cheap and any progress in chip manufacturing will boost the demand for MU. Every piece of electronic equipment will need Dram and FLASH memory. Also, MU has its own foundries, so it has little in the way of logistical issues. I think the best chips right now are the ones involved in the Data Center/Cloud area. If you believe that in the latter half of the year IoT and industrial chips get unclogged then ON Semi (ON), Texas Instruments (TXN), and NXP Semi (NXPI) could work but not yet. Just circling back to a final point, if the cloud software names will continue to do well, then it follows that chips dedicated to helping cloud performance should do equally well.

Let me Summarize: I was early in calling a bottom which did not burnish my reputation one bit. Chastened but hardly wiser, I stated that Friday’s rally was significant. I wish to abandon the notion that this is an either-or situation. We are in a bottoming process, and we can be chopping around but still making headway upward. Friday’s strong close could mean a continued rally in a parabolic fashion, but I would be careful deploying funds white it is in that mode. Rather, I think there will still be volatility and we should take advantage of that. Buy the dips will be back in vogue. At some point in this chopping around with toing and froing on whether inflation is moderating or not, there is a very good chance that a dive toward 3800 will be retested. Perhaps this time 4100 on the S&P holds.

If you enjoy my weekly stock analysis articles, You will be happy to learn that I offer a subscription service Dual Mind Research. Serop Elmayan, a brilliant young man who brings a quantitative approach to surface high probability fast-money trades, and I are partners in this service so you get the benefit of two unique investing approaches. My narrative style and his engineering approach will give you a unique value indeed. The first 2 weeks are free so check it out

This article was written by

David H. Lerner profile picture
Proven quantitative & qualitative strategies generating consistent returns
I have been writing about stocks for about a decade. I take a multi-disciplined approach but I am not doctrinaire. I come from a technology background having a software consulting business for a number of decades and also took part in business development for tech media startups. I employ technical analysis when it's called for. I believe that market psychology plays a huge role. My favorite explanation for charting is that charts are essentially a psychograph of sentiment about a stock. Market participants rely on narratives to explain a stock's appeal. If you can identify a narrative or trend as it is forming that can pay outsized rewards. I have an eclectic style and it might take you a few articles to "get" me. Update: We are launching Dual Minds Research. I am partnering with Serop Elmayan, a quantitatively oriented trader that takes an engineer's approach to set up trades. We will start at 8:30 Where I will give the general setup for the day, then after the market starts Serop will run his filter to surface trades of the day. We will attempt to be available throughout the trading day. Leave a question and we will do our best to help.

Disclosure: I/we have a beneficial long position in the shares of SNOW either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have additional positions in EXPE, LYV, ABNB, GOOGL, AMZN, AMD, MOS, IPI.
Please note: You should not take the above text as investment advice. I am not a broker, Registered Investment Advisor, or certified money manager, I cannot give financial advice. What I am doing is chronicling my thought process. If I use the word you in a sentence, I am really talking to myself, or it was a simple typo, in no way did I mean to advise you. Always do your own research and understand what you are buying, and what your risk is, and be sure before you make a purchase. Also, only trade what you can afford to lose.

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