The US Market Finally Sees A Pullback This Week

Broad Market Outlook

We finally saw a healthy pullback in the market this week, which saw a slight cooling of market sentiments. The % of S&P 600 stocks above the 20-Day moving average has dipped below the +1 S.D range and the greed-fear index has also declined slightly (Fig 1 & Fig 2). The most significant day was Wednesday where we saw an uptick in volume across all indexes as the market retraces. However, subsequent pullbacks saw a decline in the volume that is mostly below the 50-Day average volume. Furthermore, the indexes ($QQQ, $SPY, $IWM) have closed the week near the highs of Friday and held above key support levels. When we looked at the VIX, the spike is also relatively subdued (Fig 3).

Similarly, when I looked at my watchlist, almost all of the leadership stocks still held above key support levels such as the 20DMA or 10EMA. None have broken down from 50DMA on massive distribution volume. I think that these are highly constructive price and volume actions going into next week. However, this is not a guarantee that we will not see deeper pullbacks.

Fig 1: % of S&P 600 stocks above 20DMA has dipped below the +1 S.D range

Fig 2: Slight decline in market exuberance from 89 to 76 this week

Fig 3: VIX closed near to Friday's intraday low

When we look at the individual indexes, the $QQQ has seen heavy dip-buying volume if you look at the 2Hr intraday chart (Fig 4). Currently, it is holding above the support level of $298.62 and 20-Day moving average. If we breach these support levels on increased volume next week, the next support level lies at $293.51 (Fig 5).

Fig 4: Significant dip-buying volume after Wednesday's pullback

Fig 5: $QQQ is still holding above the resistance turned support level of $298.62

The $SPY has also seen heavy dip-buying volume if you look at the 2Hr intraday chart (Fig 6). Currently, it is also holding above the prior breakout turned support level of $364.38 and held above the 20DMA (Fig 7). The next support level lies at $358.75 if we breached current support levels.

Fig 6: Dip-buying volume were significantly heavier than the selling volume in $SPY's 2Hr chart

Fig 7: $SPY is still holding above the 20DMA and support level of $364.38

The $IWM has also seen heavy dip-buying volume if you look at the 2Hr intraday chart (Fig 8). The $IWM by far is holding up the best with only a pullback of 1.3% and held above the 10EMA. The next support level lies at $185.44 and the 20DMA (Fig 9).

Fig 8: Significant dip-buying volume spotted in the $IWM's 2Hr chart

Fig 9: Small caps remain the strongest index with the least pullback. Small caps will continue to lead the market.

Overall, the market remains firmly in a bullish uptrend that is seeing healthy market rotations. However, indicators are showing that there is still room for further washouts of retail investors to cool market sentiments. Hence, going into next week, we might see shakeouts early next week before the market continues rallying higher. As of now, I would say that all dips are buyable until the market has proved otherwise. Lastly, we should continue to remain open to any changes that occur in the market and adjust your plan accordingly.

Top Sectors of the Week

There are 2 groups of stocks that caught my attention this week namely biotechnology and cloud-based real estate brokerages. These sectors have broken out to all-time highs while the rest of the market is pulling back. Based on their price action in the past week, I do expect them to outperform the rest of the market in the coming weeks.

Firstly, the relative strength of $XBI and $IBB against the $SPY is breaking out to new all-time highs on an absolute basis (Fig 10 & Fig 11). Within the biotechnology industry, we have seen massive gains from vaccine makers such as Moderna ($MRNA) and BioNTech ($BNTX) in the past few months. However, I doubt there is a further significant upside in the short term. Instead, other areas that could deliver significant upside are companies involved in the provision of cold storage facilities, CRISPR gene editing and genetic testing. One of these companies that are still within the buy zone is Invitae ($NVTA) (Fig 12). The expectation of an acceleration of earnings growth in FY2021 is likely to drive this stock higher in the coming months.

Fig 10: Relative strength of $XBI against $SPY and its price are at all-time highs

Fig 11: IBB is at all-time highs as its relative strength is breaking out of consolidation

Fig 12: Invitae ($NVTA) is within 3% of the buy zone of $55.38

Secondly, I also witness unusual strength across all companies operating in the Cloud-based Real Estate Brokerage sector. As the pandemic has accelerated the shift of real estate businesses towards the cloud globally, some of the fastest-growing companies in this space that we should watch are Zillow ($ZG), EXP World Holdings ($EXPI), Fathom Holdings ($FTHM) and KE Holdings ($BEKE). The company with the best fundamental is EXP World Holdings ($EXPI) (Fig 13). This company provides cloud-based rest estate brokerage services across 7 countries. Its latest earnings release has shown 766% eps growth Y/Y and 100% revenue growth Y/Y. Not to mention, they have shown stellar earnings for the past 8 quarters at least. Based on various valuation metrics, it is also considered to be significantly undervalued compared to its more richly valued peers. Hence, I would look to build a long-term position in this stock once it starts to pull back or consolidates at the 20-Day moving average.

Fig 13: EXP World Holdings ($EXPI) breaks out of resistance level of $62.50 on increased volume

The second company that is still within the buy zone is KE Holdings ($BEKE) (Fig 14). It is a China-based cloud brokerage company that has shown 70% revenue growth Y/Y and 210% net income growth Y/Y in the latest quarter. Another thing that also captured my attention is the fact that Ark Invest has increased its stake significantly in the past 2 weeks. Based on Cathie’s Ark Twitter, $BEKE has moved into the 30th highest weighted ranked stock within across all Ark funds since Oct 30 (Fig 15).

Fig 14: KE Holdings ($BEKE) is a China-based cloud brokerage company that I have been accumulating new positions

Fig 15: Ark Invest has continuously accumulated new shares in the past 2 weeks

Have a nice weekend ahead.

Cheers!