Attention, Bears! This Rally Has Legs - Market Outlook (Ep. 32)

The U.S. stock market logged its eighth consecutive winning week, driven by strong corporate earnings and AI enthusiasm, closing near record highs despite volatile oil prices and a new low in consumer sentiment.  Despite some choppiness early in the week, the bulls finally got there act together late to push the market higher.  The S&P 500 closed the week up 0.9% and closed just shy of 7,500, achieving its eighth straight weekly gain.  The Dow Jones Industrial Average closed at an all-time record of 50,580.  The tech-heavy Nasdaq continued to rise on the strength of tech, especially some of the AI-related names, although a few names--like AMD, INTC and MU--had volatile weeks...

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Transcript

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Welcome to Market Outlook. I'm your host, Derek Taylor, also known as DT, and I'm going to be taking a look at last week in the market as well as previewing the week ahead. I will also share with you some potential options trades that I think are interesting for this week. But first, let's talk about what happened last week in the market. The U.S. stock market logged its eighth consecutive winning week, driven by strong corporate earnings and AI enthusiasm. And all that AI enthusiasm is pushing this market higher. The SP 500 closed near 7,500. It was up about 0.9% on the week. The Dow Jones Industrial Average closed at an all-time record of 50,580. The tech heavy NASDAQ continued to rise on the strength of tech, especially some of the AI-related names. Although a few names like some of the high flyers like AMD, Intel, and Micron, had some volatility this week. We also saw some volatility in the oil markets. We also saw some uh new lows as far as consumer sentiment. So, you know, some of the uh economic data has not been good. Despite all that, though, this market continues its winning streak. Global markets and oil prices, they yo-yoed a little bit this week amid ongoing geopolitical tensions and the military conflict in Iran. Furthermore, the U.S. consumer sentiment plummeted to an all-time low on fears of inflation, rising gas prices, and the market showed some resilience though, despite all of that. You know, all the numbers with the economic data, inflation, consumer sentiment, and everything, uh, oil prices, uh, bond prices, everything screams that, hey, this market should be doing bad right now. But this market has some crazy resilience. On Friday, we saw Kevin Walsh was uh officially sworn in as the new Federal Reserve chair. And during his swearing-in ceremony, President Trump gave remarks supporting Fed independence while advocating for lower interest rates to keep the economy expanding. Trump said he'd basically let Kevin Walsh do what he wanted to do. I think the market liked that. The strong Q1 earnings season has provided a major tailwind for the market, delivering an estimated 27.7% earnings growth rate for the SP 500 companies. Notable beats this week from major tech and retail companies, including Workday, Raw Stores, and Zoom, propelled major indexes to green closes, but not everything went up on earnings. Two of the largest companies that reported earnings this past week were NVIDIA and Walmart, which both fell on earnings. I think NVIDIA was already trading at an all-time high. And just because it came out with a great earnings report, you know, there's just no more buyers left at some point. It had to come down a little bit. But the uh drop in NVIDIA and Walmart, they weren't like precipitous drops, right? They they were inside the expected move kind of drops. In my opinion, this bull market is strong and has lasting momentum. And I say this because of what's going on with oil prices being so high for so long now, and the rising yields and the weak bond market, and then you have some of the macroeconomic data, and much of that hasn't all been positive. You know, there's been a lot of negative economic data come out. So, you know, that should be pushing this market lower, but this market keeps going higher. And while tech is certainly the driving force behind all of this, we're seeing participation in some of the other sectors as well. And that really tells you this rally has legs. So it's not just the Mag 10 stocks that are driving this market. I mean, they're doing okay, but it's not, it's not just tech. This market has some breadth to it. Uh, you know what is the best performing sector year to date? It's not tech. Tech is actually up 20% year to date, which is fantastic. But that that's actually the second best performing sector year to date. You know what the best performing sector year to date is? It's actually the energy sector. Energy is up a whopping 35% year to date. Consumer staples is up 11.4% year to date. Real estate is up around 10% year to date. So it's not just tech that is participating in this rally. It may be the one that is getting all the shine and a lot of the chip names, the memory names, the AI-related names. They're outperforming a little bit. But there's a lot of other things, a lot of other sectors, a lot of other companies that are doing well in this market rally. And I want to be very clear here, you know, it may not make sense to you or to me that this market keeps going up despite all of the negative stuff out there. But if there's one trading maxim that I think every trader must learn to follow, it's this trade what you see, not what you think, right? And you never want to make an assumption and just get hellbent on that's the assumption, I'm gonna be bearish, this market's about to roll over, I'm gonna just load up on long puts and short calls, and it you're gonna get run over like that. You have to trade what you see, not what you think. So for me, I'm keeping some long deltas here because I'm gonna keep riding this wave up until the market tells me otherwise. Now I'm gonna keep riding the wave up. And the market right now is telling you it wants to go up, right? So listen to the market, pay attention to the market. Do not pay attention to the news media, don't pay attention to your own wild ass assumptions. That will get you in trouble. One thing to note about this upcoming week is that Monday is Memorial Day in the U.S., which is a federal holiday and a stock market holiday. So the New York Stock Exchange and the NASDAQ Exchange will be closed on Monday in observance of Memorial Day. The bond markets will also be closed on Monday. So no trading on Monday. For those in the US, I hope you enjoy the holiday with friends and family. So let's jump into the charts and see what the major market indices did last week. Let's start with the SPX, the S P 500, which obviously in the last eight weeks, has seen a massive gain. So this past week in the market, if we zoom in and take a look at the close of the previous Friday to the close of this past Friday, you can see we had a nice little gain in the SPX of a 0.9% on the week. So the SP 500 continues to move higher. The NDX, the NASDAQ, also had a positive week. It had a gain of 1.2% on the week. So a really nice gain in the NASDAQ, but those were okay gains. If you want to see a real gain, you have to take a look at the RUT, the Russell 2000 index, which had a kind of nasty move down. But if you take a look at the close of the previous Friday to the close of this past Friday, just in that five-day time window there, that is a gain of 2.7% in the rut. That is a gain of about 75 points in the rut. Taking a look at the Dow, I'm going to take a look at DJX here, the Dow Jones index here. This saw a gain of 2.1% on the week. So a very nice gain in the Dow. And then finally, let's take a look at VIX, which is the volatility index. This is the volatility of the SP 500. If we zoom out, you can see the last eight weeks, as the market has gone up, volatility has come down. And this past week, you can see volatility really came down all five days, right? It's uh volatility has been contracting in this market. And that is a big indicator, maybe the biggest indicator to tell you that this market right now isn't worried. And when the market isn't worried, what tends to happen? Well, the market tends to go up. So again, if you're one of these barriers, if you're paying attention especially to financial media, news media, yeah, I know a lot of people are talking about, well, the market has moved so far, so fast on the way up that maybe we're in a bubble, maybe the bubble's about to burst. Be careful. Uh now maybe, you know, the market will eventually turn around. It always has its ups and downs. Yeah, so we're gonna have a down move at some point. But right now, the market is telling you that it's not likely to happen anytime real soon. Now, of course, markets are random and any kind of weird news event can change things in a hurry. But again, you have to play what you see, not what you think. So let's check out what the major market sectors did this past week. Let's start with XLK, which is the tech sector ETF. The tech sector obviously had a good week. It was up 2.3%, and that was largely what was driving the SP 500 and the NASDAQ 100 higher. The NASDAQ especially is very tech heavy. So with the Nasdaq being up, you would expect the tech sector was up this week. And it was, it had a nice 2.3% gain, which is a respectable gain. But there were several sectors that outperformed tech this past week. So that is one of the reasons why I think this market rally, uh, this rally has some legs, there's some breadth to this market, because let's take a look at the real estate sector, XLRE. This had a gain from the close of the previous Friday to the close of this past Friday. It had a nice 3.1% gain. Uh, the utilities sector also had a nice week. This had a gain of 3.4% on the week. XLV, which is the healthcare sector, ETF, this saw a gain of 3.3% on the week. XLY, which is consumer discretionary, had a gain of 2.3% on the week. XLF, which is the financial sector, this one had a more modest gain of 1.6% on the week, but really strong weeks in all six of those sectors we just mentioned. Some of the sectors that underperformed a little bit this week. XLE, which is the energy sector, ETF, basically had an unchanged week. It actually finished the week slightly positive, up 0.1% on the week. XLI, which is the industrial sector, also was basically unchanged on the week, up about 0.2% on the week. XLP, consumer staples, very similar, not much action as far as week over week. It was up 0.2% on the week. XLC, the communications sector, was actually negative on the week. This finished the week down 0.5% on the week. And then finally, uh basic materials, which is XLB, the materials sector ETF here. This actually finished the week uh exactly unchanged, really uh nothing going on in materials here. Taking a look at a few of the industry ETFs, so that some of the industries within the major sectors, let's take a look at XRT, which is the uh retail sector, because or the retail industry rather. Now, retail, we had a lot of retail companies report earnings this past week, Target and Walmart, and many, many other retailers, Lowe's, Home Depot, a whole slew of them, TJX. And the retail sector actually finished the week up 4.4% on the week. So some of those retailers reported good earnings, and that really drove the whole sector here up. XHB, which is Home Builders, Home Builders also had a nice week. This actually finished the week up 3.8% on the week. And then finally, XBI, which is the biotech industry ETF. Biotech finished the week up a modest 0.7%. So let's take a look at what some of the big mega cap tech stocks did this past week. Let's start with AMD, because AMD was the biggest gainer on the week. AMD just had a monster move. Uh it moved up 10.2% if we take a look at the close of the previous Friday to the close of this past Friday. And that 10.2% up move, a lot of that was actually the last trading day, the Friday this past week, where uh you can see we actually closed on Thursday around $449 a share. And it actually opened at around $469 on uh Friday, so a huge gap up on Friday, and then uh had a little bit of a volatile trading day, big up move, then a down move, and basically settled pretty much where it opened on that gap up. AMD is one of these stocks that has had some crazy uh momentum to the upside, and I don't know if that's going to stop anytime real soon. So be careful trading AMD. This is another one. You have to play what you see, not what you think. Don't try to call a top on a stock like this, right? If you're gonna put on a trade, put on a bullish trade, but do something defined risk to protect yourself. Do not put on bearish trades and certainly don't put on undefined risk, bearish trades like selling a call against AMD. Because you could have a day where this thing pops up 50 points or 100 points. You know, you get those kinds of days in these kinds of momentum plays, and you don't want to get run over. So never ever try to call a top on things that are moving like this. Moving on to some of the other big performers, while we're talking about things that have momentum, MU, which is Micron. Micron was only up uh 3.6% this week. And I say only up because this thing has had a crazy run up, right? So this thing has probably like 10x its price in the last year. If I zoom out on the chart, you can see this thing was trading at $100 a share, you know, a year ago. And now it's trading at, well, finished uh Friday trading at $750 a share. So just an insane run in this stock. This is another one. Play it safe, do defined risk trades. And for me, if I'm gonna play it, I'm only gonna put on a bullish play. I'm not gonna put on a bearish play. I'm not even gonna put on a neutral play that has a bearish component to it. Just because I know that uh that call side, for example, on a strangle, you're gonna be fighting that short call the whole way. And you're just gonna eat into your profits that you're making on the put side of a strangle. Or if you're doing an iron condor, which is something I would recommend, do iron condor on a play like this, define your risk. But even an iron condor, the call credit spread side of that iron condor is just gonna get murdered as this thing keeps screaming higher. So if you're gonna play it, do bullish trades, then do it defined risk, do it small, protect yourself. Uh I don't want to see people get run over on some of these momentum plays. Apple, let's move over to AAPL, which of course is Apple. Apple had a nice game this week of 2.9%. Amazon was positive on the week as well. Amazon was up 0.8% on the week. Let's move over to Netflix, which has not been the sexiest of stocks, but it did have a positive week this past week. It was up 1.8%. Palantir also finished the week positive. Palantir has been kind of trading sideways to actually lower a little bit, right? It's kind of been trending down more than trending up. So it really hasn't participated much in the market rally, but it was up 2.2% this past week. And then Tesla. Tesla was a winner this week. It was up 0.9% on the week. And then let's talk about some of those stocks that didn't do all that well. Let's start with the big dog, NVIDIA. NVIDIA had earnings and it sold off after earnings. And uh NVIDIA finished the week down 4.4% on the week. But no, don't worry about NVIDIA. NVIDIA's strong. The earnings report was great. Uh it's just naturally, if I zoom out, you know, it was trading pretty much at all-time highs here. At some point on the way up, all the people that are gonna get along this thing are already in, right? You just run out of buyers sometimes on these things, and then you get an earnings report that's really good. Naturally, some people are gonna take some profits. I certainly would do so if I've been holding NVIDIA, you know, if I was holding NVIDIA back here, which not that long ago, where it was trading at $150 a share. Really not that long ago, it was trading at $100 a share. And now it's trading at uh $215. Yeah, maybe take a little bit of profit. It's one of those things every now and then you I hear stories about people that, you know, own shares of Apple or own shares of Amazon, you know, 20, 25 years ago. And you know, if they'd held on to, you know, a few hundred dollars worth of shares of that stuff that they owned back then, you know, and it'd be worth millions of dollars now. And what were they thinking? Well, you know, what were they thinking is what every like nobody holds on to profits like that. At some point, when things go up, you know, you you have to get out. Once something doubles in price, for example, you have to get out. Now, yeah, maybe something went up uh 10x, 100x, 1,000 X, but nobody, there is not a single human being on the planet that holds something for those kinds of gains, right? Typically, once you make a nice profit in something, 50% profit, certainly 100% profit, you're gonna get out, you're gonna take profits. So I always find it a little weird when I hear these stories of people, oh, if I only held this or only held that, you know, and it's something that they held, you know, 10, 15, 20, 30 years ago. Uh, those stories to me uh don't make any sense, right? At some point you just gotta let it go and move on with life. Let's take a look at AVGO, Broadcom. Broadcom finished negative on the week as well. It was down uh 2.6% on the week. Google also finished down this week. Google was down 3.5%. Uh kind of a uh nasty move in Google, but Google is not far from its all-time highs. So naturally, again, probably a situation where you just run out of buyers and people are taking profits. Coinbase was also negative on the week. Coinbase was down 5.3% on the week. And then Meta and Microsoft, which have been underperformers recently, uh really for the last several months. This past week, Meta was down 0.6%. Not much of a move. If I zoom out, you can see you know, Meta has not really participated in the market rally at all. Microsoft was also down 0.6% this past week. And if I zoom out on it, you can see it too has really missed most of this market rally. So Meta and Microsoft continue to underperform the rest of the Mag Ten type stocks. Let's move over to some of the futures and commodities. Let's start with uh some of the energy futures. Let's actually take a look at their ETF forms. Let's start with crude oil because obviously it's all about oil these days. Oil is the big uh it's the big driving force in this market as far as it is kind of our new volatility indicator, right? It's kind of another form of the VIX, right? If you want to see volatility in the market, is oil up today or is oil down today? That tells you a lot about what's going on in the stock market. So USO this past week was down 4.9%. That is a good sign, right? So that's basically like volatility contracting if oil's contracting as well. So now that's part of why I think the market had a good week, is that oil was down. If we take a look at UNG, which is the natural gas ETF, natty gas was down 3.4% also this week. So both oil and gas were a little bit lower. Let's move over to the crypto space. Let me take a look at iBit, which is the Bitcoin ETF. iBit was down 4.1% on the week. You can actually see a big gap down between the previous Friday to uh Monday this past week. We had a big gap down, and you know, we went lower from there as well. So Bitcoin was really weak, and that was partly why Coinbase, when we took a look at Coinbase, uh it was down kind of big this week. Ethereum, if we take a look at ETHA, Ethereum was also down. Um this was actually down 7.1% on the week. So Ethereum a little weaker than Bitcoin, but both of them had pretty nasty weeks. Moving over to the metals, let's start with GLD, which is the gold ETF. GLD was down 0.8% on the week here. Taking a look at SLV, which is the silver ETF, silver was down 1% on the week. And uh taking a look at the chart on both gold and silver uh last week, they had a big gap down between Thursday and Friday of the previous week. But since that big gap down, they um they moved slightly lower in the last five trading sessions since the big move down. Taking a look at the US dollar, I'm gonna take a look at UUP, which is the dollar index ETF. UUP finished the week trading uh basically exactly where it was. And it was actually unchanged over those five trading sessions. So the dollar didn't move. We take a look at the major components of the dollar index. We'll take a look at the euro. So the euro, it was down very slightly down about 0.1%. And FXB, which is the British pound ETF, if I can load it up here. The British pound, I'm gonna have to zoom in here because we've got, yeah, the close of the previous Friday and then the close of this past Friday. That's actually a pretty sizable move. That's a 1% up move in the British pound. FXY, which is the Japanese yen ETF, if I can pipe it correctly here. FXY finished the week down 0.3% on the week. And then finally, another big market indicator is the bonds. I'm gonna take a look at TLT, which is the 20-plus year Treasury bond ETF, which you know we had a new low last week. Uh that was Tuesday of this past week, but then Wednesday, Thursday, and Friday, we had major up moves all three days, and we needed those. And I really think the big move up in bonds that also was a calming force in the market. The market really wants to see oil come down, the market really wants to see bonds go up, and we Got that this week. That's exactly what we needed. Had we got the reverse and oil went up and bonds continued to crash, this could have been a real uh scary time in the market. But thankfully, we got exactly what we needed. So let's talk about some of the earnings this week. So we're in a weird week. It's only a four-day week because Monday is Memorial Day. Plus, we're at the end of the earnings cycle. There's not much left that reports earnings. I'm going to give you maybe a dozen names here. None of these are sexy names as far as options trading, but you're we've got slim pickings here, right? So uh Monday, both before and after the bill, nothing of note reports because it's a federal holiday, it's a stock market holiday. Uh typically, most companies, if it's a major company, they're not going to report on a market holiday typically. So nothing to worry about on Monday. Tuesday before the bell, AZO, which is AutoZone, reports, not a very liquid stock. Tuesday after the bill, ZS, which is Zscaler, reports after the bill. It's okay. Uh Wednesday before the bill, you have uh Dick's Sporting Goods, Ambercrombie and Fitch, uh PDD, which is Pin Duo Duo, and then BBWI, uh, that's Bath and Body Works. Mediocre names all around there, but if you really want to trade something, you know, Dix is moderately tradable in that group. Wednesday after the bill, you have Marvell, you have uh CRM, you have Snow, and you have HPQ as Hewlett-Packard. And uh Marvell, probably the most interesting play out of that group. Thursday before the bill, BBY, which is uh Best Buy, uh HRL Hormel Foods, B U R L Burlington Coat Factory, and KSS, which is Kohl's, they're they're not really all that liquid. Uh, I can just tell you, you're you're as an options trader, it would be hard to find anything to do in any of those tickers. I only mentioned them just because there's not much left to talk about as far as earnings. Thursday after the bell, Dell, Costco, and Okta. And those are pretty tradable. I might actually try to do something in Dell and Costco this week. And then Friday, both before and after the bell, nothing of note reports earnings. So let's talk about some trade ideas for this week. You know, one trade idea I want to talk about is you know, I play a lot of the metals. I've got silver positions, I've got a pretty sizable silver position. I often have things going on in gold, both in the actual gold as far as GLD, the gold ETF, as well as gold miners like Newmont mining or GDX, which is the gold mining sectors. Uh, and I like to play copper sometimes as well. This is the HG futures, the copper futures. This is a big product, way too big for most people to trade, and and I don't trade it. But what I want to do is, you know, I I long term I'm bullish on copper. The chart is kind of in a bullish pattern right now. Had a bit of a sell-off last week, along with silver and gold. We had a big drop, but I think it's probably got some legs to move to the upside. So the way I want to play it is with FCX, which is Freeport McMoran, which is a uh a mining company. Uh it's got a big exposure to copper. It's mainly a copper play, is the way people treat this. It's got good IV rank, already reported earnings as well. And for me, if I just want to be long copper, I would go to this company, FCX, and maybe sell the 23 delta put. And I get a 181 credit on a buying power reduction of $550. That's great risk reward as far as this. We're only tying up $550 for the potential to make $81. So I like the risk reward. The pop on this trade being a 23 delta put, you expect the pop to be around 77%. Tasty trades uh reporting a 75% pop. If you manage the trade at 50%, so a 50% winner, the P50 number is actually 87%. Really high probability trade. And this is uh again for me because I'm bullish in directional assumption and I want to be bullish in this company, it's a great way to uh potentially get long shares too at a decent price if you don't mind running the wheel. Sell this put and you either win a dollar eighty-one or it goes against you, and what happens? Well, you get shares at a cheaper price. In this case, FCX is trading at $62 a share, the closing price on Friday. And if I sell the 23 Delta put here, that's the 55 strike. Plus, I get a 181 credit, I would get assigned shares around uh $53.19. Would I mind owning this company at that price? Yeah, I mean that's a $9 discount on shares from where it's trading at right now. And again, I get the shares. I turn around, sell covered calls against it, and I would just start running the wheel. Another trade I want to talk about uh is some of these meme stocks, these momentum plays. We we talked about AMD earlier, Micron, uh, Intel's been having a big run up. I'm gonna pull up Micron because Micron has just been up and straight to the moon, right? And I I mentioned, do not put on a bearish trade at all. You're just asking for trouble trying to call a top. I would be bullish and I would be defined risk. How would I do that? Well, here's the way I tend to play these things. I go out about 30 to 60 days. In this case, I'll go to the 55-day cycle, the July monthly cycle. And I like going up to the expected move to the call side. So right now, Micron's trading at 750. And in 55 days, the expected move up is around uh 940, 950. I'll pick 950 because it's a nice round number. So I'll buy the 950 call and sell the 960 call. Now that forms a call debit spread. And because I, in this case, I formed a $10 widespread, I'm paying $1.75. So I'm paying $175 for a $10 spread. That means my max profit is $825 because $10 minus the $175 debit I pay for it means there's $825 of profit potential here. So if Micron continues to run up over the next two months, which is a reasonable assumption, right? Uh I have the chance to pay very little for this trade for the potential to make quite a bit. Now the pop, the probability of profits reported that it's only a 20% pop. But realistically, with something that has serious momentum and hasn't seen a downtick in what seems like a year, I would say that my odds are a little bit better than 20% on this trade. And again, I'm getting great risk versus reward because I'm paying very little for the chance to make quite a bit on something that has real upside momentum. So that's the way I would play these stocks with some serious momentum to the upside, is I do them defined risk, I do them small in size, and I never bet against them. You know, I go with the momentum. I'm not, you know, trying to call a top. I wouldn't go do this on the put side and do a put debit spread. Again, I think you're just kind of asking for trouble on those. So that's it for this week's edition of Market Outlook. For those of you listening to the audio version on Apple or Spotify, please give the show a five-star rating. Help us grow in the algorithms. For those of you watching on YouTube, there is a link in the YouTube description, a link to my book, The Super Wheel Option Strategy. This book is published on Amazon. This book is about one of my favorite option strategies, which is the wheel option strategy. Again, you'll find a link to the book in the show description. Also, consider joining the DT Options Patreon slash Discord. When you sign up to my Patreon, you are granted access to a members-only Discord channel where I hold a live voice chat every trading day. Every day that the stock market is open, we get together and chat for a little while. I share my trading platform. You guys get to see all the trades I'm in. Opening trades, closing trades, trade management, roles. And I get to bounce ideas off of you guys. You guys get to bounce ideas off of me. And we've got a really great trading community there, and we'd love to have you too. Peace, guys.