Bigger They Are, Harder They Fall

By TradeSmith Research Team

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A major correction may be about to begin… How to make money by getting “slapped in the face”… Japan abandons NIRP, and traders love it… Bigshot bitcoin investors open the kimono on May 15… The ultimate destination of trillions in sidelined funds…

By Michael Salvatore, Editor, TradeSmith Daily

It’s one of the scariest charts in the market. Because no matter who you are or what you invest in, there’s no escaping its impact.

It won’t take much more downside to trigger what could easily become a painful correction over the next few weeks.

I’m talking about the ever-tightening bearish rising wedge pattern in the S&P 500 — America’s retirement account and the guiding light for many financial assets.

Take a look…

The S&P 500 has been forming this pattern since November. Bearish rising wedges occur when an asset makes a series of higher highs and higher lows that get gradually closer together.

Because stocks have mostly gone up for the past five months, and because we’re at new highs, there’s very little in the way of downside support. The former all-time highs that we broke through in January, around 4,800, are the next logical resistance point — down 7% from here.

The 4,600 level, tested as resistance back in August and again in December before breaking through, is the next best argument we can make for support. And that’s about 11% lower.

Amid all this, the Relative Strength Index has been waning in momentum even as stocks have pushed higher. This is a major warning sign and tells me that the rising wedge is likely to resolve downward.

You know what they say: The bigger they are, the harder they fall. The lagging action in major Magnificent 7 stocks and S&P 500 constituents — namely Apple (AAPL), Tesla (TSLA), and Google (GOOG) — are weighing the index down. The generals are beginning to fall in battle — another warning sign.

One final warning sign: With 2024 being a leap year, the ides of March came a day early. And stocks closed down 0.2% yesterday.

(OK, one more — the American Black Bear’s hibernation period runs from mid-December to mid-March. Yes, I’m serious.)

To be clear, I don’t think a correction over the next few weeks is a death knell for the market. More a healthy cooling-off period that’s necessary for a sustained bull market.

❖ Still, corrections can provide ample trading opportunities…

Just ask one of TradeSmith’s top-notch trading analysts, who’s been warning of a downswing all this month. Here’s William McCanless writing to his Trade Cycles subscribers in his March gameplan:

Markets are overbought… and, depending on who you ask, we’re either not “too overbought” yet or we’re in full-on bubble territory.

This chart below of rolling four-months change in the S&P 500 shows that the current rally is indicative of either a post-recession rally or a bubble — but still hasn’t “officially” reached those heights:

Source: Bloomberg (via Deutsche Bank)

With conditions like these, William is waiting to get “slapped in the face” with a trade setup so obvious, he’d be a fool not to pull the trigger. More from William, again in Trade Cycles, reflecting on the most recent wins and losses:

We will short this again — for sure — when it’s the right time. And I expect that it will be one of the best trades we ever enter here at Trade Cycles.

Something’s got to give, because this doesn’t make sense.

But here’s the thing — I’ll know it when I see it. I’ll know it when it slaps me in the face.

Our best trades so far in the first three months of the year have been “slapped in the face” trades.

Here’s what I mean by that…

When I looked at gold, the chart practically reached out and slapped me in the face. It looked so completely obvious as to what was about to happen that I’d have to be the biggest idiot in the world not to buy it right then and there.

Oil was a similar trade. So was the China trade. But the other trades that we closed out for losses had no such slapped-in-the-face phenomenon.

I was “meh” about them. I did not have a super high conviction. I was confused on the market (and I still am until April). So, I was just trying to find halfway decent opportunities, long and short.

This was the wrong approach.

Because in my personal day trading — and also swing trading — I often have the mentality that I don’t have to go out and “find” an opportunity.

All I have to do is watch the market. At some point — how and when, I never know — there is going to be a trade setup that presents itself to me that is so completely obvious… so clear and so shockingly strong… that it slaps me right in the face, and I’d have to be a complete moron not to act on it.

You can’t fight this irrational streak before it ends… that’s a way to get your trading account slapped in the face.

In other words, don’t trade just to trade. Wait only for the trade setups that you’re confident to act on, and act on them. That’s the ticket to profits.

Moving on to other areas of irrationality reversing…

❖ Japan’s interest rates are expected to rise… to zero…

The Bank of Japan’s short-term rate has been stuck in negative territory for almost 10 years. As soon as June, they’re set to rise into positive (OK, more like null) territory.

Negative interest rates were an unusual experiment by Japan’s central bank. Enacted in 2016, the move was designed to fend off deflation and stimulate economic growth.

With negative rates, holding money in a bank account would penalize the saver — costing them for the privilege of giving their money to the bank. That meant the only alternative was to spend and invest.

Strange as it was, the effect on Japan’s stock market was altogether positive, if muted. Check out this chart of Japanese interest rates and the Nikkei 225 index going back to the previous all-time high:

Since Japan’s rates went negative, the Nikkei 225 has risen a modest 115%. That’s got nothing on U.S. stocks, obviously. But it was at the very least a sustained bull market that broke through the previous highs from over 30 years ago.

Now that rates are set to go positive, again, the playbook has changed. But investors clearly like what they see, with Japanese stocks up over 16% year-to-date, outperforming the U.S. stock market.

Our take? The momentum is behind Japanese stocks, and this normalization of the economy is a step in the right direction.

Japan has been one of the standouts in the ex-U.S. stock trade, and chances are strong it’ll stay that way. Buying a few high-quality Japanese company American depository receipts (ADRs) to round out your portfolio would be a prudent move.

(Coincidentally, William McCanless recommended a trade to take advantage of the tenuous U.S. markets and the action in Japan simultaneously. Trade Cycles subscribers can check out that new recommendation right here.)

❖ Who’s buying the bitcoin ETFs? We’ll learn soon…

The bitcoin ETFs were a watershed moment that many a bull have been waiting years for. Finally, there was a simple, turnkey, no-nonsense way for not just everyday investors, but major institutions to buy into bitcoin.

The obvious question then becomes: who’s buying? We’ll find out in about two months. May 15 marks 45 days after the calendar quarter. That’s the deadline for investors with more than $100 million under management to file their 13F forms, which disclose their holdings of publicly traded stocks.

That level of AUM covers thousands of institutional investors, including firms like Berkshire Hathaway (Warren Buffett), Pershing Square Holdings (Bill Ackman), Bridgewater Associates (Ray Dalio)… but also massive money managers like Vanguard, BlackRock, and Fidelity.

It’ll be fascinating to see if the bigshots are putting their money where their mouth is — either by buying into the bitcoin ETFs, or by missing out on this trade entirely.

Another interesting thing to note: the bitcoin ETFs have attracted $10 billion in flows over the last two months, and now hold about 4% of the total circulating supply of bitcoin in the market — or about 800,000 bitcoin.

Clearly, the ETFs were a hit. And they’ve been a big driver of bitcoin’s price gains over the past few months.

Our advice, though, remains the same: buy the ETFs if all you’re looking to do is trade bitcoin. If you want not just the price gains of bitcoin, but also its utility as a store of value and a transferable asset, you’ll need the genuine article.

❖ Finally, Louis Navellier is preparing for a generational wealth transfer to rival COVID…

The COVID era was in many ways a massive wealth transfer from the bottom of the wealth spectrum to the tippy top.

While countless blue-collar jobs were lost in the immediate shutdowns, the U.S. government and Federal Reserve ensured that financial markets would be just fine. The result was a massive stock market bubble, totally detached from reality, that largely benefitted the top 1% of wealth in the country.

At the same time, paycheck protection programs and other incentives were abused by business owners to the tune of millions of dollars… making the few rounds of stimulus checks almost insulting by comparison.

Today, though, a different kind of wealth transfer is taking place.

One that doesn’t require already being in the top 1%, or having a business, or anything else like it.

Quite simply, there are unstoppable forces at play in the financial world that are set to move close to $9 trillion from the sidelines and into the world’s top growth stocks.

40-year stock-picking expert Louis Navellier is doing everything he can to share these ideas with his readers, ensuring they get to take part in the wealth transfer and benefit.

And with the market set to correct over the next few weeks, all that means is better entry points on the five growth stocks he thinks every investor should own to take part of this guaranteed wealth transfer.

Louis has all the details in this exclusive replay of Wednesday’s launch event. (In that event, Louis revealed the name of one stock set to benefit from this unique situation.)

We may be in for a rough patch these next few weeks. But no matter what happens, we’ll have you covered right here in TradeSmith Daily.

Just as one example, tomorrow I’m talking to a brilliant analyst from outside TradeSmith who’s clued in on an A.I. trade most of the market is ignoring… but could become the single most important application of the technology thus far.

Stay safe out there, and have a great weekend,

Michael Salvatore
Editor, TradeSmith Daily