Why the Santa Rally failed QQQ is preparing a big move, be careful | Top Advisor Corner

Next week could make or break the Santa Rally.

The Federal Reserve will meet on December 12th and 13th, and CPI and PPI will be released simultaneously. As a result, it’s not a bad idea to review your portfolio carefully, consider taking some profits, and explore some potential ways to hedge. Nonetheless, the Nasdaq 100 Index (NDX) is poised for a big, potentially strong performance soon. Given the strong seasonal trend, further upside cannot be ruled out.

This is especially noteworthy given the recent liquidity scare and unexpected recovery in the financial system, which I explain just below. Let’s start by looking at the price chart of Invesco QQQ Trust (QQQ).

Starting with the chase, the Bollinger Bands are tightening around the QQQ price. As I explained in detail here, it’s a signal., a big move is coming. Moreover, fund flows expressed as Accumulation/Distribution (ADI) and On Balance Volume (OBV) are becoming more active. A move of QQQ above $394 will likely trigger a slew of algo trading programs waiting for a trade breakout.

Why the Santa Rally failed last week

Stock traders who took profits from the October 2023 bottom can thank the bond market for their luck. This means that a big reversal in bond yields is likely to lead to a big sell-off in stocks. On the other hand, as could only happen in the strange world of Wall Street, the recent bond rally almost paralyzed the entire financial system. December 1st.

In fact, the recent slump in the Santa Claus rally, which saw the market recover significantly, may have been caused by a decrease in liquidity in the financial system due to the bond rally. The speed at which the bond rally has reportedly put pressure on Wall Street’s money lenders (the repo market) and the Fed’s QT strategy have put pressure on the monetary powder keg, sending bond yields up significantly.

The whole thing was so strange that it took multiple reviews from multiple sources to piece it together. But here’s a simplified version. The Fed’s “higher is higher” mantra and QT through selling Treasury bonds (removing liquidity from the system) has drained borrowed money from Wall Street’s piggy banks, typically leaving less funds than needed to finance rallies. Yes. In stocks and bonds.

Translation: We had a mini-liquidity crisis as Wall Street ran out of money to lend for several days. Please stay with me. You can’t make this up.

Liquidity in the financial system came under pressure when US Treasury yields (TNX) rose to 5% (May-October 2023), stimulated by the Fed’s QT and panicked sellers joining the bond sale. So even though there was a lot of interest in buying stocks and bonds when sentiment changed, Wall Street’s lending machines didn’t have enough reserve funds, or air pockets, to lend out to hungry traders.

Visual evidence of the problem was the rise in the Secured Overnight Trading Rate (SOFR) on December 1, 2023. This is best seen in the Zoom thumbnail to the right of the price chart.

As a result, people who were caught off guard and missed the rally in stocks and bonds ended up playing catch-up, making their predictions here. In October, we suddenly found ourselves with a limited supply of funds available to borrow for reversal trades. SOFR is now back in sync with the federal funds rate. But yes. It was certainly an interesting development.

Bond Yields Pause, Mortgage Strength Continues to Decline

So where are we now? SOFR appears to be back in sync with the federal funds rate, which has restarted the stock market rally. On the other hand, the US 10-year Treasury yield (TNX) has shown a significant increase in a short period of time, which means that we can expect some recovery in the short term.

In fact, the decline in TNX could continue for the next few weeks as CPI and PPI numbers are released and the Federal Reserve meets on December 12-13. Watch for a yield range of 4.25-4.4%. A move above that key area could halt some algo selling in stocks and bonds.

Mortgage rates have fallen. A breach of less than 7% on the average mortgage could push the mortgage up to 6.8%, which is where the series’ 50-day moving average will be tested.

As a result, homebuilder stocks, like the SPDR S&P Homebuilders ETF ( It is lower than the closing price on December 2, 2023.

Long-term fundamentals of supply and demand remain favorable for homebuilders and related sectors. To take the next step in your career as a homebuilder and other important market segments, join Joe Duarte’s Smart Money for free at Money Options.com. 2 week trial subscription.

For more analysis on homebuilder stocks and real estate stocks, click here.

Interesting emerging sector

These days, I’m focusing on value investing.like i did my latest Your Daily 5 videoyou can catch here. Coincidentally, this trend appears to be expanding into areas that many investors are not interested in. Comparing the movement of the S&P 500 Citigroup Pure Growth Index (SPXPG) with the trend of the S&P 500 Citigroup Pure Growth Index (SPXPV) allows you to see dynamic developments.

One of the least likely areas of the market to benefit from the value trend is the transportation sector. In the transportation sector, the challenges faced by trucking companies are making headlines, but other subsectors are reaping the rewards.

You can see this in the movement of the SPDR S&P Transportation ETF (XTN). The ETF has quietly surpassed its 200-day moving average and, barring a negative development, appears poised to run at old highs near the low 80-day range.

Market breadth recovers after liquidity squeeze

The NYSE advance decline line (NYAD) is still in bullish territory and trading above its 50-day and 200-day moving averages. A slowdown may occur in the near term as the RSI indicator is approaching overbought levels. However, the market is maintaining breadth, even if the rate of increase is slower than that of NYAD.

The Nasdaq 100 Index (NDX) was just over 16,000. And with the Bollinger Bands starting to put pressure on the price, it looks like a big move is just around the corner. Both ADI and OBV are leveling off as profit taking increases.

The S&P 500 (SPX) remained above 4500 and is expected to rise above 4600. This is not surprising, as many value stocks continue to push the SPX higher.

VIX remains below 20

The CBOE Volatility Index (VIX) remained below 20. This is optimistic.

When the VIX rises, it means traders are buying large amounts of put options. When market makers’ put option trading volume increases, they sell stock index futures to avoid risk. A decline in VIX is optimistic because it leads to fewer put option purchases, which ultimately leads to call purchases. This forces market makers to hedge by buying stock index futures, increasing the probability that stock prices will rise.

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Joe Duarte

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Joe Duarte is a former money manager, active trader, and widely regarded independent stock market analyst since 1987. He has written eight investment books, including bestsellers. Trading options for beginnersRated Benzinga.com’s TOP Options Books of 2018 Now the third edition is out. A book about everything you should know about investing in your 20s and 30s And six other trading books.

A book about everything you should know about investing in your 20s and 30s Can be used on amazon and Barnes & Noble. It was also recommended. Washington Post Currency Color of the Month.

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