Santa Rally or Correction?

Stocks didn’t get the holiday “memo.”

Last week was, of course, Thanksgiving week.

The stock market was closed on Thursday, and closed early on Friday. 

And yet, the bulls still showed up last week. 

The S&P 500 gained 1% on the week, while The Nasdaq gained 0.9%. 

It was the fourth consecutive green week for both major indices. 

Despite the impressive rally, this is STILL an environment where you want to be buying stocks. 

Today, we’ll explain why in this issue. But we want to first welcome you to The Discount Weekly. Each week, we examine the biggest issues facing traders and investors… and explain what they mean for your wealth.

This week is all about the stock market. Specifically, we’re going to examine why stocks are headed even higher. 

Let’s jump right into things… 

All Evidence Points to a “Risk On” Environment

The mainstream financial media is obsessed with the indices.

And we get it…

Many investors have the bulk of their wealth in funds like SPY and QQQ. Not only that, the indices are a great way to quickly assess the health of the stock market.

But they don’t tell the whole story… 

To truly understand what’s going on, you have to look below the surface. So, let’s look at some of the most important areas of the market, starting with technology stocks. 

Tech is the largest and most important sector in the entire market. It makes up 29% of the S&P 500, and 50% of the Nasdaq.

Earlier this year, tech stocks led the way… before cooling off for a few months. But, after taking a little breather, technology stocks are leading the charge again. 

Last week, The Technology Sector SPDR ETF (XLK) climbed 0.9% on the week. It ended the week at its highest level ever. 

But it’s not just the mega-cap tech leaders that are performing. Many groups within the sector are strong. 

Software, for example, is one of the strongest industries in the market!

Last week, The iShares Software ETF (IGV) gained an impressive 1.8% higher. Like the indices, it closed the week for the fourth time in a row. 

Communication stocks have also performed phenomenally. 

See for yourself. Here we’re looking at the performance of the Communication Services Sector SPDR Fund (XLC), which invests in companies like Meta (META), Google (GOOG), and Netflix (NFLX). 

Last week, XLC gained 1.3%. It was the fourth week in a row that it climbed higher. It’s now trading at the highest level since January 2022. 

Consumer discretionary stocks are another “risk on” area of the market that’s performed well lately.

Take a look at this chart. It shows the performance of the Consumer Discretionary SPDR ETF (XLY), which invests in companies that sell things people “want” rather than “need.” Its holdings include Amazon (AMZN), Tesla (TSLA), and Nike (NKE). 

We can see that XLY has been on the move lately, rallying 13% over the past month. 

And here’s the thing…

And consumer discretionary stocks aren’t just performing well in an absolute sense. They’re also performing well on a relative basis. 

XLY has been outperforming the Consumer Staples SPDR ETF (XLP) since December. 

Simply put, this is not bearish.

If the market was heading for trouble, consumer discretionary stocks wouldn’t be outperforming consumer staples. They’ve be underperforming!

If you’ve been following our work lately, you know that one of our biggest concerns was poor market breadth.

Basically, a handful of stocks have been propping up the market for much of this year. That’s not a sign of a healthy market. 

But market breadth is becoming less and less of an issue by the day. In other words, participation is also widening. 

The Industrial Sector ETF (XLI) gained 0.7% on the week. This was an area of the market that had recently fallen out of favor. So, it’s encouraging to see industrials performing well again. 

Small caps have also joined the party lately.

Take a look at this chart. It shows the performance of the iShares Russell 2000 ETF (IWM), a fund that invests in small cap stocks. 

We can clearly see that IWM recently fell below its pre-Covid highs… before quickly changing direction.

This is what’s known as a “false breakdown.” This type of price action often produces powerful moves in the opposite direction. In other words, we could see small caps headed even higher from here in the coming months. 

In short, it’s becoming harder and harder to be bearish on stocks here. The bullish evidence simply keeps mounting up. 

Having said that, the market has been on an absolute tear lately. So, don’t be surprised if the market pulls back a bit in the coming weeks.

Just understand that we’re now in a dip buying opportunity. So, be ready to take advantage of a correction if we get one soon. 

Join us in our FREE Telegram Channel. We update our followers in real-time, with common sense analysis on the trades we are taking, currently in, and keeping our eye on. Common sense analysis that anyone, from beginner-to-advanced, can easily understand and take advantage of.

Don’t forget to follow us on YouTube for market updates as well.

P.S. - If you are interested in LIVE Trading, Monday - Friday mornings, we have a LIVE Day Trading Room with over 50+ professionals, intermediates and beginners. Give it a test drive 7 Days for $7 here.

See You Next Sunday!