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Market Update: Too Early to Declare Victory

May 18, 2023
MARKET UPDATE: Too soon to declare victory.
As I have said many times before on this page GAPS GET FILLED. Let me explain. First, let's talk about who is moving this market. Retail investors and Institutions. Even though their roles are similar, one of the biggest differences between retail investors and institutions is the concept of how they purchase equities.
Retail investors (everyday people) buy companies they like when they like them which tends to be after a majority of the hype has already driven up the stock price. Now let's talk about Institutions. Anyone who has worked with or been behind the scenes with an institutional trader knows that Wall Street doesn't buy companies based on news, timing, or feeling...they purchase them solely on price levels, and most of the time those trades are put in place far in advance.
When it comes to investing in volatile markets it is important to recognize these behaviors and plan around them. Here is how they work. These trades are done by computers and institutional traders on software that produces what is called "Hunt and Destroy Algorithms" to specifically target important price levels that have been historically significant. When it finds these gaps or levels it specifically sets limit orders around them called "order flow" to eliminate them. Think of these like air pockets. All around them, there is resistance (buyers and sellers) but once you get into the pocket, you have no resistance getting you to the other side. This can work both to the upside and downside.
As you can see in the picture there is a gap from earlier this year in the 420-422 space on the chart from earlier this year where there is no price history as well as five other attempts where the market has tried to break through and failed (aka a rejection).
With all this said, it is extremely important not to declare victory from our conservative approach until we successfully breakthrough at the minimum of 422 or the previous high of 430 on SPY.
Another thing to consider is that in 9 out of the last 9 recessions, victory was shown with small-cap stocks (Russell 2000) outperforming Large-cap stocks (NASDAQ) because smaller companies tend to be more nimble and quicker in responding to the economy than larger companies in the business environment. (See picture attached). This is the opposite of what is going on right now which is quite concerning as it seems that the market is being held up by the success of 7-10 of the largest companies in the US. (AAPL, MSFT, GOOG, GOOGL, NVDA, TSLA, META, AMZN)
The only way to be sure is to see how this plays out over the next few weeks, but as always, more updates to come soon!