• Kaiser L

End of Year Rally is Heating Up Quickly

Great to back blogging during my semester break. For anyone who follows the market closely, we are currently in “risk-on” mode as almost all leading sectors are breaking to all-time highs or nearing 52-weeks highs. Small caps are finally leading the market after a substantial period of lagging behind the $QQQ, with relative strength near the highs. Not to mention, the 10EMA is acting as a support for this rally, which is highly evident of increased risk appetite among investors and traders (Fig 1).

Fig 1: IWM is at all-time highs

$QQQ conversely is featuring a volatility compression pattern (VCP) setup, with declining volume and price compression (Fig 2). This is a constructive pattern that means that there is a high probability that $QQQ will run even higher into the end of the year. Based on my daily updated list of leadership stocks, I have also observed many individual technology stocks are already at all-time highs. Some of the hottest sectors/themes that are seeing massive price momentum are recent IPO listings, semiconductors, solar, Internet, e-commerce, online gambling, advertising, space travel and electric vehicles (EVs). As more retail traders participate due to FOMO, this will likely push existing technology leadership stocks to higher prices and valuation.

Fig 2: Volatility compression pattern set-up in the QQQ with declining volume.

Similar to other indices, the $SPY is nearing all-time highs and the faster moving averages are acting as the support level. Additionally, all moving averages are trending upwards which is highly supportive of the notion that the market is likely to trend higher towards the end of the year (Fig 3). At this point, I won’t even surprised if the $SPY is going to rally another ~30 points to reach 400. Not to mention, Janet Yellen is going to be the incoming US treasury secretary, which is a boon for the stock market. We won't be seeing any massive threat to the influx of excess cash into the market.

Fig 3: SPY is currently consolidating on the faster moving averages.

However, safe haven commodities such as $GLD and $SLV are areas I would totally avoid for now. Gold broke the support level on Monday with an increased volume, and it is already below the 200DMA (Fig 4). This is not a place I would want to be involved in when the rest of the booming market is for me to choose. Similarly, for silver, it broke its support level and it is likely to retest the 200DMA in coming days or weeks (Fig 5). Lithium, however, is one area I will look out for since it is used in electric vehicles and the EV theme is heating up fast. I believe lithium companies could benefit from the price momentum in the EV sector.

Fig 4: Gold is breaking down with increased volume.
Fig 5 : Silver is breaking down with increased volume and likely to retest the 200DMA.

Interesting sectors to note:

1. Solar Sector

There is massive volume accumulation seen in the $TAN ETF (Fig 6). The sector is seeing secular tailwinds from the incoming Biden administration, as well as earnings growth among the leading solar players. From a technical standpoint, many of the solar stocks like $FSLR, $SEDG, $NOVA, $RUN are coming out of a monthly bull flag or multi-year base, which is highly constructive. I see the probability of the sector going higher or parabolic as highly likely.

Fig 6: 10-week moving average continues to act as the support level as $TAN rallies higher.

2. IPO Listings:

$IPO/$SPY relative strength and $IPO are at all-time highs. It is highly bullish for the market since IPOs are one of the riskier areas in the market. I am seeing many constructive set-ups going into the end of the year. Some of the IPOs that have already at all-time highs or breaking out include Snowflake (SNOW) and Unity software (U) (Fig 7 and Fig 8). Personally, I view new listings as a great way for new trading opportunities as many are the fastest-growing companies that will deliver massive price appreciation in the coming months and years. I will have a separate blog post which will discuss some of the set-ups I am tracking closely in the next few days.

Fig 7: Breaking out to all-time highs on increased volume.
Fig 8: Unity Software, a video game platform, is one of the hottest IPO issues this year.

3. Electric Vehicles (EV) Sector:

Things have already gone bananas in this space, with many delivering triple-digit gains in less than 2 weeks. Some of the stocks include NIO (NIO), XPeng (XPEV), Tesla (TSLA), Blink Charging (BLNK). My belief is that it could go higher in the long term due to the long-term transition into greener vehicles globally. However, in the short term, EV-related stocks could face a sharp pullback since many are over-extended from every moving averages. Hence, I personally don't think it is a prime time to establish any long position.

4. Digital gambling:

Secular tailwinds from increased adoption of digital gambling during coronavirus lockdown and more states are legalizing sports betting in the US. Some of the stocks that I am either tracking or already positioned include $DKNG, $GAN, $NGMS, $PENN (Fig 9).

Fig 9: Awaiting breakout from Friday's high. Industry momentum and IPO fervor provide massive upside potential.

5. Advertising & Social media:

During the earnings season, many of the social media companies crushed earnings. Pinterest (PINS) reported adjusted earnings of 13 cents a share on revenue of $443 million. Revenue jumped 58% from the year-ago quarter. Snap (SNAP) similarly crushed earnings with $678 million revenue (Wall Street expected third-quarter revenue of $550.5 million) and a 1-cent profit (Wall street expected a 5-cent loss) (Fig 10). Smaller advertising-related plays such as Magnite (MGNI) and Sprout Social (SPT) (Fig 11).

Fig 10: Snap is entering post-earning drift mode.
Fig 11: Another high potential social media SaaS set-up that is looking to rally higher.

6. Software Application:

Many of the individual SaaS stocks are still consolidating or at their early stage of the breakout. As software application sector remains one of the key leadership sectors, market rotation into the space going into the end of the year is likely. I would be looking to add on pullbacks to increase my exposure to SaaS. Some of the stocks I am looking at include Crowdstrike (CRWD), Zsaler (ZS), Digital Turbine (APPS), Datadog (DDOG), Workiva (WK), Yalla Group (YALA) (Fig 12, 13, 14).

Fig 12: Early stage of breaking out of a multi-month base, which presents big upside potential.
Fig 13: Crowdstrike has been consolidating for multiple months after its 150% rally in April.
Fig 14: Volatility compression pattern & declining volume is constructive for Digital Turbine (APPS).

Overall, the market is seeing broad participation which is very bullish. However, it is also easy to become greedy and lose sight of your plans since everything is going in one direction – up. A pullback always comes at the most unexpected timing and it is important to take partial profit according to your plan to avoid giving back everything.

Just a side note, I will be starting to incorporate options into my trading. If you have any interesting reads or blogs to introduce, feel free to ping me.

Have a nice weekend friend.