Why Are Stocks Surging? Because the Free Market is DEAD…

I preached patience as market momentum stalled last week. Now, we’re seeing stocks lift off as the quarantined masses finally start to see a light at the end of the coronavirus tunnel.

I’m not smart enough (or, frankly, stupid enough) to try and pick the exact moment the market turns.

But as far as I’m concerned, the evidence was leading overwhelmingly in favor of the bulls this week…

After all, S&P 500 super support held 2,800 on the weekly like a champ. Now we’re seeing the S&P rocket back above 2,900 to jump above its April highs.

SPX chart

The tech takeoff also remains strong, with the big boys in the Nasdaq 100 less than 4% from their all-time highs – yes, all-time highs! Some folks want to argue about the Nasdaq 100 becoming too top heavy since 50% of its market cap is made up of just five companies. But it is what it is…

For me, it’s all about following the money. The political backdrop is very clear: The Fed is going to do anything and everything to keep this market afloat. They even talk about buying stocks. The Fed said that it’s not likely, but they didn’t rule out! This money flow is unprecedented — and it’s going to continue.

Of course, the fundamentals obviously fell off a cliff. But the stock market’s not the economy. We’ve seen that in the last month, as the situation continues to get worse. Meanwhile, the stock market climbs and holds its gains. And that’s where the stock market still remains extremely attractive. Plus, people are conditioned to put money in the stock market where they can get better appreciation than anything out there.

The free market is dead — but you have to be a buyer if this is how they’re going to play the game!

Keep it In the Money,

Alan Knuckman

Alan Knuckman
Editor, In-The-Money

Chart of the Day: The Next Retail Winners

Greg GuenthnerIt’s no secret that the coronavirus shutdowns have crushed the retail sector.

You’ve no doubt seen the high-profile bankruptcies of J.Crew, J.C. Penney’s and Neiman Marcus. Shuttered shopping malls have exposed the weakest companies in the sector. When your customers are stuck at home, there’s nowhere to hide…

Despite the carnage amongst the vulnerable mall stores, you can still find a few winners in the ragged retail sector. In fact, some of the nation’s most prolific discount outlets are set to thrive in a post-corona world.

“Sales at discount stores are already proving to be a bright spot,” CNN reports. “For the week ending on May 10, sales in the category, which includes names like Dollar General and Dollar Tree as well as clothing chains like Marshalls, increased 53% compared with the year prior, according to Facteus, a firm that analyzes daily card transactions. That’s at a higher clip than sales at wholesale clubs, drugstores, and grocery stores.”

In fact, Dollar General Corp. (NYSE:DG) is wasting no time posting new highs. The discount chain has already jumped 35% and counting off its March lows.

DG chart

DG has consolidated nicely in the $180-range. A close above $185 should ignite the next leg of this retail rally…

Trading Tip of the Day

Jesse Livermore is famous for making (and losing) several fortunes over his lifetime. The “Boy Plunger” made his millions betting against the market during the Panic of 1907. He then screwed up and lost 90% of his winnings almost immediately after on a botched cotton trade.

What went wrong? Livermore admits he mismanaged the cotton trade because he broke several of his key trading rules.

Let’s learn from the Boy Plunger’s mistakes. Here’s one of the key rules that helped him bounce back:

Never buy a stock because it has had a big decline from its previous high.

Yes, turnaround plays are some of the most lucrative trades you’ll ever see. But you won’t hit a winner if you’re only buying because the stock is down big.

Downtrends can last a long time—longer than most investors expect. Snatching up shares of an ailing stock just because it’s cheap or has taken a beating recently is a surefire way to get in hot water.

When you’re looking for turnaround plays, make sure the chart is showing signs of life. Sure, you might miss the first leg of a comeback move. But you won’t lose a chunk of change by taking a chance with a stock that’s in free-fall.

— Greg Guenthner

You May Also Be Interested In:

Alan Knuckman

Alan hails from the home of options trading in Chicago, where he began working as a clerk on the floor of the Chicago Board of Trade (CBOT). Beginning with his days on the floor, Alan’s worked with all aspects of the options markets for the past 25+ years.

Transitioning from a clerk to a floor...

View More By Alan Knuckman