Maybe Federal Reserve Chairman Jerome Powell should go on TV every Sunday. Stocks shot higher to start the week, making up last week’s lost ground. The BIG 3 indexes, the NADSAQ, S&P 500 and DOW have closed out their headroom and are pushing against resistance.
The next couple of days of trading will be key as prices gapped up to start the trading week. The NASDAQ closed at 9,014.56 on Friday afternoon and opened at 9,177.15 on Monday. That 162.59 point difference without any shares trading is the gap up (It’s called a gap down when shares open a lot lower than their previous close.) The S&P 500 and the DOW also opened higher than they closed last Friday.
From experience, one of two things happen following gaps up/down.
- Its a trend confirmation gap and stocks move considerably in the current trend’s direction. In this case, the trend following the March low has been up. The opening gap was up and so the indexes should continue their upward trajectory.
- Stocks backtrack and fill in the gap. What that means prices move back to the previous day’s close. In this case, 9,014.56 for the NASDAQ, 23,685.42 for the DOW and 2,863.70 for the S&P. (Note: its usually not an exact match but comes close. For example, the NASDAQ could slip to 9,025 instead of 9,014.) Normally, prices will resume the direction of the underlying trend after filling in the gap. Once again, up in this case.
We put it at 55/45 that # 2 is the more likely option since the BIG 3 didn’t achieve visible, current cycle highs. In fact, we see a flattening out of the trendlines for the DOW and S&P 500; whereas, the NASDAQ has mostly maintained its angle of ascent.
As regular readers know, we take our cue from the NASDAQ as it tends to lead rather than follow. However, it would be a mistake not to pay attention to the story the DOW and S&P are telling. In the last few weeks, the DOW and S&P 500 have spun a tale of uncertainty. As you can see on the S&P chart below, the move higher has flattened as the range from top to bottom has widened out. This is also known as consolidation.
Transitions out of consolidation are generally followed by substantial moves in the direction of the breakout. If the prices break the upper guardrail, its likely up, up and away, probably back to pre-COVID-19 levels. On the other hand, fall through the bottom guardrail and a trip the 50-day average is the best we can hope for. Breach the 50-day and its possible we test the April lows, if not the corona low.
Hopefully, Wall Street makes it easy for us and powers it’s way higher for the rest of the week. If not, sideways trading is probably on tap with slightly higher highs and slightly lower lows; i.e. the widening we see on the S&P chart. Quite frankly, choice B is my least favorite market type as it lacks conviction. Like a kite in swirling wind, you don’t know where it’s going next.
Marijuana was the only sector on our leaderboard to post a gain in the last week. ETFMG Alternative Harvest ETF (MJ) popped 7.67% on Monday on heavier than normal volume. The exchange traded fund has moved very aggressively in the last three trading days. In the last year, volume spikes have been typically followed by some profit taking.
If history holds, then support at $12 could be a possible entry point for investors looking for weed exposure. On the upside, MJ could move to $16 without much trouble. Moving from $16 to above $20 could take some time, marked by choppy trading.
Outside of the tobacco companies that have moved into the marijuana space, the purer industry plays in ETFMG Alternative Harvest ETF are all speculative. Of the stocks in the portfolio, the one we would consider is Aphria Inc. (APHA).
Unlike most of their peers, the medical cannabis company is profitable and trades at just 11.97 times earnings per share with sales growth of 95% in the last quarter. Earnings could move higher as management becomes more efficient. As of now, Aphria has a slight positive Return on Equity (ROE) and is way ahead of the pack in that regard.
Additionally, APHA trades at a little more than 2 times revenue, the second lowest number in the group, despite being one of the fastest growing companies. They do have one of the higher debt loads, but nothing that should inhibit their ability to get additional financing if needed.
In the last 52-weeks, APHA has traded as low as $1.95 and as high as $7.68. Based on the last year’s range, Aphria Inc. (APHA) has $1.63 downside to its 52-week low and $4.10 upside to its 52-week high. That’s a 2.5 to 1 reward to risk ratio and above the minimum of 2 to 1 that we seek.
May are your longs go up and all your shorts go down!