The Silver Bear Cafe

As stocks continue to explode off their October lows, powerful rallies are rippling through the markets, triggering some much-needed FOMO amongst the unwashed masses.

If you’re one of the unfortunate souls who loaded up on bearish bets into this face-ripper, you’ll need to perform some evasive maneuvers to limit your losses as the melt-up rally accelerates into the holiday shopping season.

There’s no reason to throw your hands up and surrender your portfolio to mediocre returns during the final few weeks of the year — even if the market’s sudden shift has caught you off guard. You haven’t completely missed your chance for trading greatness…not yet!

In fact, even the world’s most pessimistic uber-bears can ride stocks higher as waves of sold-out bulls buy back the shares they sold back in October.

A trader stuck on the wrong side of a rally is a lot like a soldier getting caught in an ambush. Bullets are flying, so staying put is not an option. If you’re suddenly taking fire — real or metaphorical — your enemy probably has you right where they want you. Sitting on your hands only makes your situation worse.

Last week, we discussed how the rally evolved, why the market bounced where it did, and how to regroup if you missed the initial move off the lows. Click here if you missed it…

This week, I’m going to dig into specific actions you can take to play the rally, including how to adjust your market strategy to benefit from a melt-up move. Plus, I’ll show you a hidden opportunity to trade against the herd and potentially outperform the averages into 2024.

There’s an endless supply of bearish news available for consumption. In October, we were faced with poor market breadth and a near-total evaporation of new highs — all while the major averages threatened to sink to five-month lows.

And that’s just price action! The news was even worse. A fresh war in the Middle East had investors on edge as World War 3 and Black Monday began trending on social media. Even mainstream financial pundits were expecting cataclysmic events to rip through the markets, sparking a historic crash.

Instead, the market gave us a quick washout below key support to set up the rally that’s unfolding right now. Sentiment tipped extremely bearish at the exact wrong time – a normal period of market weakness that perfectly aligned with seasonal trends.

Investors who are unable to change their minds fast enough are now forced to watch stocks explode higher without them. Or worse, they’re left to frantically cover short positions into the powerful holiday melt-up rally.

The market’s going to chew you to bits if you get too caught up in fundamental arguments during these important turning points. Sure, some stocks are falling apart after badly missing earnings estimates or lowering expectations. But most stocks are catching higher with a strong seasonal tailwind aiding their rise.

To be clear, I’m not suggesting economic or fundamental concerns are wrong or completely useless. But you’re wasting your time trying to fight a rally during this incredible seasonal strength.

Your best bet is to table those bearish thoughts until January. For now, the best strategy is to turn off your brain and buy.

Mega-caps and other market leaders rolling over is a fairly reliable sign that the market is near the end of a drawdown.

This is the exact action we saw toward the end of October — just as stocks were about to turn higher.

Sellers come for the big boys last since these names usually act as “safe havens” for investors trying to hide from the carnage. These little washouts will typically scare some weak hands out of their positions. The dips then lead to abrupt upside reversals as stocks find buyers and begin to push off their lows.

The “Magnificent Seven” mega-caps have outperformed all year by a wide margin. That’s no secret! Professional and Main Street investors alike have been hiding in these names since the broad market rally began to cool in July.

I don’t think these stocks are going to suddenly fall off a cliff. But I do think other stocks have a better shot at producing faster gains into January.

Instead of piling into stocks like NVDA and META that are already pushing to new highs, shift your trading focus to the more rate-sensitive growth names in tech. I’m talking about the stocks that took big hits over the past three months as the market corrected. Software stocks, biotechs, and the former tech-growth darlings are ripe for huge short-covering rallies into the holidays.

Fundamentally flawed names sporting hot charts will be the best trades over the next seven weeks. They probably won’t magically become market leaders in 2024. But they will give you the opportunity to play catch up as the market roars higher into December.

Greg Guenthner, CMT, is chief strategist at Forge Research Group. He has spent the better part of the past two decades developing long-term and short-term strategies with a single goal in mind: to help everyday investors generate outstanding returns and control their financial futures. Greg’s charts, analysis, and insights have appeared in Marketwatch, Forbes, Yahoo Finance, and many other financial publications.

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