Newsletter of Danny Merkel - Issue #134
Market Review:
The weakness in small stocks should now be clear to everyone, so I won’t belabour that point, but rather focus on big-tech.
The strength in QQQ this year has been undeniable, but that rally’s foundation is starting to show a few cracks.
After Friday’s notable weakness, QQQ appears to be putting in a right-shoulder in what could be a short-term top:
Put another way, price has just put in a lower-high. The next key question will be whether QQQ dips beneath the mid-August low, which would be a lower-low.
Semi-conductors were a major drag on tech this week, with NVDA showing major signs of distribution on Friday:
In addition, notice how each time NVDA reaches new all-time-high territory (red arrows) it pulls back and pauses.
In my opinion, this is a sign of exhaustion. A robust rally would permit price to form one new ATH after another.
Interesting ETFs:
Most major countries have an ETF solely dedicated to that nation’s stock market and keeping an eye on these funds can be a good way to determine the health of stocks globally.
A new observation that I can offer involves weakness in Europe. To be more specific, the Sweden iShares ETF, shown below, has multiple issues.
Firstly, this year’s entire rally never came close to challenging its ATH:
In other words, the fact that the bulls weren’t even able to recoup half of last year’s losses is a sign of weakness.
Secondly, price appears to be forming a rounded top with a new lower-high just having been formed.
Finally, the 100ema has just dipped back below the 150ema, indicating that the long-term trend has shifted back to down.
And it’s not just Sweden that appears week. Germany (EWG) is doing the exact same thing. The global economy is not firing on all cylinders.
Gold:
Though I was initially quite optimistic on gold, I was forced to change my mind due to the unfolding price action of the ever-evolving current moment.
Gold, for lack of a better word, is dead. Each and every new high has been sold off. Every rally fails:
The only redeeming aspect of the chart above is that gap support has been holding all year. That should have been useful and actionable information to the astute trader.
But just hanging on to gap support isn’t “good enough” in a world with 6% interest rates. As the next chart shows, simply earning interest on cash has outperformed the yellow metal for the past 2 years:
Not only has collecting interest been more profitable, it has also been much less stressful. Why lose sleep dealing with gold’s erratic price swings when you can earn a cool, calm and steady yield on cash.
Another under-appreciated aspect of this comparison is that gold is much more volatile than an ETF such as USFR.
Because my position sizing rules are directly based on volatility, this means that I’m allowed to take a much larger position in USFR, which means that the position is not just more profitable, but the position itself is larger.
Individual Stocks:
The price action this week in the vast majority of stocks has been very poor. Very mushy.
Nonetheless, there will always be a handful of stocks that are holding up better than average.
For instance, a stock such as ANF looks decent, printing a white candle on Friday in a sea of black of candles.
The stock also sports a strong Momentum Gap and a solid uptrend:
Another stock that is showing half-decent relative strength is Tesla.