Wide, loose, waiting for clarity
Where we are
Last week's report was focused on being Defensive, but not bearish. I still think that is the right way to think about the market going into this week. There are red flags in some of the prior leaders but there is definitely healthy rotation going on under the hood.
June was a much different market than April/May. April and May were strong clean trends. New trades got traction quickly, breakouts followed through, and the mindset was wanting to give new trades as much room as possible and sit tight.
June got choppier. More overnight gaps, wider ranges, and more breakouts that would round trip and fail.
Going into July we have to expect more of that until proven otherwise. Earlier in this trend to get involved sometimes I would have to buy strength and it would be immediately followed up by more strength and give a cushion. If June taught us anything it is that the days to buy and get involved are pullbacks and on weakness when it doesn't feel very comfortable. If you bought strength or chased a strong open you got chopped up... and this environment is very good at making you feel FOMO and doing just that if you aren't disciplined.
Rotation
The main trade that led us higher since April has been AI infrastructure. Semis, memory, neoclouds, opticals, all the stuff tied to the infrastructure buildout. A lot of these stocks April/May traded very clean. They may have had a few aggressive pullbacks but all within a strong uptrend and the pullbacks were quickly bought up. Now those groups have been under pressure.
Most of the leaders that were the focus of this trend have changed character. The action has become very wide & loose... we also have seen good news being sold into instead of a catalyst to go higher. MU reported blow out earnings, gapped up, and was sold into.
After such massive moves its healthy to consolidate and its needed to support the next leg up, so its possible they are rebasing and haven't topped but we don't need to know that answer now for me to want to avoid that group for the time being.
The better action has started to show up elsewhere.
• Fintech
• Cybersecurity
• Select software
• Social media
• Healthcare
If prior leaders in semis/neoclouds are rebasing and begin to tighten up constructively over the next few weeks than I would begin to prioritize them again, but for now there are new groups acting better.
For context of how much the action in AI Infra has changed, revisit my report from April 12 "The whole AI stack is moving".
Trade management in the chop
The biggest adjustment for me this month is trade management.
Normally I do not like selling into strength. I would rather let a stock trend, keep raising my worst case scenario, and give the position room as long as the stock is acting right.
That works great in a clean trend. In a sideways market it can turn into round tripping everything.
When I look at the trades from the last week or two that failed or that I ended up exiting, a lot of them gave me around 10% gain first before round tripping. That is useful information. The market was rewarding good weakness entries, I just kept trying to trade them like April and May instead of fully accepting that June was a different tape and we may go sideways longer than I anticipated.
Until the market environment gets easier again, if a new trade gets around that recent average gain, I want to be more aggressive keeping some of it. Trim some, tighten the stop, raise the worst case faster. Not because I am scared, but because this tape has been rewarding aggressive defense more than patience.
That is not a permanent change to how I want to trade. If a real trend resumes, I want to let stocks work again. But while the market is chopping sideways and a lot of names are wide and loose, giving every stock maximum room has not been the right adjustment.
Plan for this week
I am starting the week completely reset and fully cash. I went cash because I felt out of sync, not because I am bearish. There is a big difference. The market can keep going higher without me and that is fine. I would rather miss a few trades than keep round tripping and giving back progress I made from the easy environment April/May.
April/May making progress was easy and I'd rather force my way into some trades and risk taking a few losses to get involved. Now the past few weeks making progress has been difficult and that mindset has changed. The main thing this week is not forcing trades, and not going backwards. Regardless if there is rotation happening and the market is going higher I need to get back in sync & see my equity curve start to make progress again before trying to get aggressive.
If the market is consolidating and breaks out eventually it will keep inviting me in and there will be plenty of time with the wind at my back. Remember there is never a rush, golden opportunities in the market are windows not just 1 or 2 good days. Feeling like you need to make something happen and are rushed is the worst possible mindset to be trading from.