Trading with AlphaVL: The Newsletter for Growth and Momentum Investing

AlphaVL Trading: The Key to Profiting from S&P 500 Industrials.

 

“In trading / investing it's not about how much you make, but how much you don't lose.” Bernard Baruch

  

The market direction for equities advanced Friday, with market participants taking note of a softer tone from members of the Federal Reserve's committee. This has raised expectations for a 0.25-point rate hike at their next meeting and another 0.25-point hike in March.

 According to the CME Group's Fed Watch, there is a 55% probability that US interest rates will pause in May, suggesting market participants are optimistic about economic growth momentum over this period. With upcoming big cap tech earnings reports being released next week, investors will be keeping an eagle eye on market fluctuations, looking to capitalize on any potential soft-landing scenarios resulting from the data.

 Friday’s close showed that growth - momentum had again changed direction as equity indexes rose. The bullish market breadth on both the NYSE and NASDAQ was encouraging, advancing issues beat declining issues at a ratio of almost 4:1 on the NYSE and 2.6:1 on the NASDAQ, with volume at 83% and 86%, respectively. This increase in positive activity pushed stocks up along with oil prices rising 1.07 to $81.40 per barrel, accompanied by gains in Gold for a change; this precious metal gained 5.50 and closed at $1929.40 an ounce. The VIX retreated 3.27% down to 19.85, closing strong, despite a turbulent few days in the markets prior to Friday's gains. All of the movements demonstrate that growth after weeks of a negative outlook may be poised to make a quick turnaround.

 Despite the holiday-shortened trading week with volatile market conditions, our bullish signal on January 12th remains intact. Evidence of this strong signal lies in both the wider market, where a positive direction is suggested by improving breadth, as well as in our smaller trading watch list that is detailed in the spreadsheet attached. Analysis over the weeks ending January 20th clearly indicate that profitability is achievable even in unpredictable markets.

As the quarterly earnings season progresses, investors have held on to positive reactions despite the potential for weaker growth in leading stocks. Goldman Sachs saw a decline following their Q4 earnings miss, but Morgan Stanley stood in stark contrast when their earnings miss was met with larger optimism as the Nasdaq Composite reclaimed all YTD losses by Friday's close. The Dow Jones Industrial Average and S&P 500 saw an upwards movement as well and managed to overcome a sizable portion of their weekly losses. This positive directional change had traders optimistic and bullish over positive growth potentials by market close on Friday.

 

While there is no denying the fact that the market had a poor week ending the 20^th, we must not lose focus on the Year to date (YTD) results through  January 20^th. The Dow Jones Industrial Average is up 0.71%, the S&P 500 is up 3.52%, the NASDAQ 100 is up 6.16% and the Russell 2000 is up 6.13% and the SMH is up 12.03%.  Lest you are not familiar with the SMH, it is an ETF, the Vanek Vectors Semiconductor ETF, which  seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS US Listed Semiconductor 25 Index (MVSMHTR). 

 

I  entered this past week, you may recall that I had set up ten Bull Call Spreads for possible trades on Tuesday, believing that the upward trend would remain intact.  Tuesday’s action was such that I changed course for the week while only placing three trades, in LW, SPY, and ASML. The week ended up with two losing and one winning trade, however it was a profitable week with a 23.1% return on the premium spent. The SPY trade carried the week.

 The fourth quarter earnings season for the S&P 500 is off to a less than impressive start. Companies are reporting surprises mostly to the downside with the number and magnitude of positive surprises well below their 5-year and 10-year averages. Looking back, this marks the first year-over-year decline in earnings since Q3 2020. To date, the situation continues its downward trajectory as companies report negative surprises and analysts revise estimates further downwards. Thus, the overall trend in earnings decline for this quarter looks set to continue, while feeding the market volatility. 

 As such, I will set up possible trades in the DIA, IWM, QQQ and SPY on both sides of the screen Bull Calls and Bear Puts while waiting for the market to do what it will do best, day by day.  These trades may end up as Day Trades or Swing Trades, but I will not be holding anything for a long period over the next three or four weeks.

 To access the current copy of the data behind our trading please follow this link: Trading with AlphaVL

Good luck and Good Investing!