It's all too easy to get caught up in the moment...
But it's important to remember we're currently experiencing extraordinary market conditions.
Semiconductors have posted a rally for the ages. Mega-cap tech continues to shove the top-heavy averages higher into what is traditionally a weak season for stocks. Even tiny, unknown cryptocurrencies are exploding as Bitcoin tops $70K and pushes to new all-time highs.
It's a speculator's paradise - which is exactly why you should be on the lookout for trouble.
You see, the stock market is always playing an amazing psychological trick on investors. It convinces our lizard brains that present market conditions will continue forever, whether we're in the midst of a rip-roaring rally or a painful bear market.
This phenomenon affects long-term investors, short-term speculators, and everyone in between. No matter your investing horizon, you get sucked into the herd mentality: This is how it is - and how it always was.
Stocks only go up. Stocks only go down. Stocks will be stuck in this chop forever. Whatever the conditions, we convince ourselves that it will always be this way.
Of course, this couldn't be further from the truth. If we can yank ourselves out of this collective stupor, we'll remember just how bearish the world looked a few short months ago in October 2023 - just before this huge rally caught everyone off guard.
I'm not just talking about sentiment. Ominous feelings had been building since the summer rally began to fade into the third quarter. But many stocks were taking huge hits, with some names getting awfully close to violating key support levels. The bad news was piling up left and right, and It looked as if the market was about to roll over... until it didn't.
Then, seemingly out of nowhere, a huge oversold rally appeared. This rally snowballed into a full-fledged melt up into the holidays, picking off the bears left and right. The action eventually convinced just about everyone that this was the market default, not that choppy mess from the past few months.
If there's one constant in the markets, it's that right as you begin to get comfortable with the current conditions, they abruptly change.
You're probably sick of hearing about NVIDIA Corp. (NVDA) and its unstoppable run. But I'm seeing some new developments right now that could cause one of those sudden market shifts we've discussed today...
While I don't believe "calling tops" is a repeatable edge we can exploit in the markets, I think we might have just spotted a dreaded reversal day in the high-flying semiconductor stocks.
Here's how it went down:
NVDA pushed closer to the $1,000 mark early Friday - a round-number target the bulls have been eyeing since the stock blasted higher off its February earnings report. But NVDA fell short of four digits, stalling out in the $970s as an actual pullback began to form. The stock was red before midday and continued to fall into the afternoon session. By the closing bell, the early gains had evaporated and the stock finished the session down more than 5%.
Now, we're staring face to face with a bearish engulfing candle following one of the most insane rallies in recent memory. If I were neck deep in out-of-the-money NVDA calls heading into the weekend, I would've had trouble sleeping at night.
Friday's potential reversal day hasn't led to a major whoosh lower in the semiconductors. Not yet! But trading action throughout the group was muted at best on Monday, so I would stay on high alert for a sudden swing lower. Once the speculator class realizes it can't count on these stocks to push higher every single day, they will abandon them for other plays.
My final word of caution with the semis: I don't think it's wise to attempt to quick-call a major crash in NVDA shares (or any other semiconductor stock, for that matter). Stay on the lookout for downside action - but don't load up on the short side without confirmation that a move lower has started.
As the market has already demonstrated, these big rallies can last a lot longer than we think...
I've spilled a ton of ink this year following the semiconductor soap opera.
But if the overbought tech rally is finally settling down, you're going to want to get a head start on the rotation trades that are already flashing buy signals.
I wrote about some of these key breakouts last week, including the small-cap Russell 2000 approaching new two-year highs. For the record, I still see the Russell playing "catch-up" with the big boys into the summer (this is, in fact, one of the big market predictions I made way back in December).
There are other trades that are also quite intriguing right now - even if most folks aren't paying close attention.
What about gold?
No, I'm not talking about the rip-roaring crypto bull. Instead, I want to highlight an old-school gold breakout to new all-time highs.
Gold has settled higher for nine straight sessions as it closes in on $2,200 for the first time ever. Impressive! But words don't do the chart justice...
I chose not to draw any lines on this long-term gold chart dating back to the mid 2000s. Price speaks for itself. Gold has finally extended higher following numerous failed attempts going all the way back to Aug. 2020.
This breakout looks like the real deal - and I would not be surprised to see it quickly extend higher in the weeks ahead. In fact, I believe it could trigger a multi-year run like we experienced during the last commodity super cycle, illustrated by the sharp move higher into the 2011 blow-off top back toward the left side of the chart.
Of course, there are multiple ways to play this breakout. Silver will probably be in play, as well as copper. And the beaten-down gold miners will also enjoy some time in the sun (we currently have a bullish options play on the Van Eck Gold Miners ETF (GDX) over at The Trading Desk).
As market conditions inevitably change, those who are slow to adapt will miss the beginnings of these important rotations. Save yourself the trouble of chasing the FOMO rallies that are getting a little long in the tooth - and hop on some fresh breakouts instead.
The Daily Reckoning