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The S&P 500 and Nasdaq Composite both extended their gains last week, increasing by 3.5% and 3.4%. The Nasdaq Composite has now seen a golden cross (50-day up through 200-day moving average), which is widely regarded as a bullish sign. That said, the next major hurdle will be getting back above the 20-month moving average (teal line) for two consecutive closes, which would significantly increase the probability of this cyclical bear market being over and transitioning into a new bull market.
It’s important to note the on average, cyclical bull markets are at least two years in length and typically enjoy minimum 50% gains (3500 x 1.5 = 5250 on the S&P 500).

(Source: TC2000.com)
As discussed in previous updates, we saw a rare breadth thrust trigger on January 12 that occurs when the advancers/decliners ratio (summed 10-day average of NYSE advancers/decliners) goes above 1.98. A move like this one requires extreme buying pressure to occur, which is what makes the signal so bullish.
This signal has a strong track record with positive returns 88% of the time over the next 12 months. Hence, the odds are strongly in favor of the bulls over the next 3-9 months, potentially setting up rally back to the 4400-4600 level even if this signal were to underperform the average. Past returns and drawdowns are shown below:

(Source: Market Data, Author’s Table)
Up until last week, the performance of this signal was diverging somewhat from the historical averages, with the S&P 500 down 3.19% on a 2-month return basis, a clear underperformance vs. an average 5.31% gain in the past 27 signals.
However, we have since seen it move back in line with its average, with returns for the 2-month marking the exact low for the S&P 500 during its recent correction. This is a positive sign given that when a current signal diverges massively from the historical averages, this can be a reason to begin to second guess the validity of the signal, especially when returns have been so robust and positive with few outliers over the past 70 years.
Valuation & Sentiment
Moving over to valuation and sentiment, the S&P 500 continues to trade above its long-term moving average in regards to the Shiller PE ratio, with the current Shiller PE ratio sitting at 29.8 vs. a long-term average of 28.0.
The good news is that this is a significant improvement from a reading of 40.0 in January 2022 and we are no longer in nosebleed territory. The bad news is that during periods of higher rates or elevated inflation, the Shiller PE ratio typically bottoms below 22.0, and we didn’t come remotely close to this level even at the lows of 3500 for the S&P 500.
That said, valuation is not a great short-term timing indicator, but rather, it simply gives us an idea of how far a market can go in a given direction. So while this indicator remains on a neutral reading with valuations unsupportive of higher prices, this doesn’t mean one can’t maintain significant long exposure, especially if one is building a portfolio around high-quality names trading at discounts, such as our past picks Capri Holdings (CPRI), Restaurant Brands International (QSR), MarineMax (HZO), Restoration Hardware (RH), and i-80 Gold (IAUX).

(Source: Multpl.com, Author’s Chart)
From a sentiment perspective, we haven’t seen any sign of complacency over the several months and we actually saw a meaningful increase in negative sentiment during mid-March amid worries of bank crisis. Sentiment is a much better predictor of future returns and as is shown below, sentiment continues to be supportive of higher prices in the market given that there’s a complete absence of real optimism out there.
So, while sentiment indicators may not be on contrarian bullish readings after last week’s rally, they are nowhere near what I would consider to be sell signals and suggest that the path of least resistance for the market is higher and that any 8% plus pullbacks in the S&P 500 have a high probability of being bought.

(Source: CBOE Data, Author’s Chart)

(Source: Daily Sentiment Index Data, Author’s Chart)
What’s The Best Course Of Action?
Heading into the week, the S&P 500 is well above the midpoint of its strong support/resistance range (3500 vs. 4315) at 4110. It is also back above the midpoint of its range using short-term support at 3765 – 4315 resistance, resulting in a less favorable reward/risk setup for the market short term. That said, there’s no major resistance for the market until the 4190-4300 region, so this rally could extend further. Given the breadth thrust signal and the fact that the market is rallying in the face of bad news, I continue to see this as a buy-the-dip market, and I would not hesitate to increase my position in the S&P 500 ETF (SPY) if we head back below the 3800 level.

ETF Watchlist
This rally appears to be getting a little stretched here, so as prudent traders who are, first and foremost, capital preservation. So the question then becomes, if the market rally is losing steam, where can we look to make a trade?
First, there is the old trading saying that cash is a position. Meaning, you don’t have to be trading constantly, day in and day out. In fact, that is a great way to burn through your portoflio balance. Trust me, I have seen it many times throughout my decades-long coaching career.
However, if a setup presents itself, we need to act if we want to become successful traders. Execution is still another major part of this business.
Utilities Select Sector SPDR ETF (XLU)
So, if the idea is to look for A+ setups, we must always be on the look out and when trading sectors, we need to be able to spot trends in certain areas of the market. If the market does continue to lose steam there are two sectors we can look to.
One would be the sector we have talked about in the not so recent past, gold. The other would be one we haven’t touched on in a while, however, one that is usually a bright spot in a weak market.
Utilities is typically viewed at as a defensive sector. When prices of stocks in the tech industry or wherever else are falling because investors are fleeing in search of a safe place to hide, gold and utilities are typically near the top of the list.
When the economy slows, people still need to pay for their utilities. This sector is one of those sectors that is essential to everyday life, so naturally, investors view this sector as more resilient in times of uncertainty. Keep an eye on this sector for a “safe-haven” to any market pullbacks that might take place.
Be sure to watch the video below for more!
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If you want to see all the latest trades my students and I put on for my Smart Trades options trading service, you’ll have to join today! Smart Trades is where I teach my students how I trade options on some of the largest ETFs on the exchange. As you learn, you’ll get exclusive access to all my trades with notifications any time one is put on. Now, you can learn how many use this high-income skill to achieve financial freedom. Join today!
I look forward to trading with you, but until then, as always…
Good Luck With Your Trading!
Christian Tharp, CMT

For today’s Daily Smart Report, we are revisiting a stock that, if you read these articles, we highlighted not too long ago. We want to revisit this stock because of the setup it is giving us during this recent market rally.
Intel (INTC) has created one of my students and I’s favorite setups. As you can see in the video, INTC has been largely stuck in a well-defined range, bouncing back and fourth between major support and resistance levels. Now, the stock has broken out of this range to the upside. This sets the stage for a break and retest to go higher.
You’ll see that after the stock broke out of the resistance level, it lost a bit of steam and now looks like it could be headed back down to that level. The idea is that the resistance level, once broken, will now act as support for the price.
This is often a high probability setup, which also gives the trader a clear point of entry. What you would do in a trade like this is wait until the level gets back down to support, or near it, and look for a reversal higher.
Not only do you have a plan for this trade laid out for you, but you can also easily determine your risk. Should the price break below support, you would simply exit the trade. If you attribute your stop to a dollar amount or percentage, you would simply exit when your risk tolerance is triggered.
As you trade more and more, you’ll find certain setups over and over again, giving you practice on which setups you feel comfortable trading. Learn more when you watch the video below and be sure to consider joining my students and I every week as we go live with our trading!
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When you join The Profit Machine, you’ll learn all about my favorite stocks, setups, strategies, and plenty more. The best part, you’ll receive all my trades every step of the learning process, so not only will you get a world-class education, but you’ll also earn while you learn.

Get a jump start on your options education and put yourself in position to win in 2023. Sign up today! Until then…
Good Luck With Your Trading!
Christian Tharp, CMT

Most everyone came into 2023 expecting a rough first half on expectations continued rate hikes would lead to economic contraction, if not a full blown recession.
Instead, January was one of the best months on record as economic data remained robust while inflation began to ebb, lending credence to the notion of a ‘no landing’ scenario.
Following the recent mini-banking crisis, expectations are now for an even more severe contraction as both demand for loans, which the yields or the cost to borrow are significantly higher, and the desire to lend due to risk factors, have fallen off a cliff.
Despite all the bearish economic indicators, we have seen a sharp rebound in the markets since the run on the bank that took place mid-March. In the three weeks since SVB’s historic collapse, the Nasdaq 100 (QQQ) has rallied over 9.2% and the SPDR 500 (SPY) is up 4.1%. The first three months of 2023 delivered the best quarterly performance since Q2 of 2020.
Given the broader context, I don’t think very many people expected this to be the case. However, there of course is always the old saying to remember, what goes up, must come down.
However euphoric this kind of bullishness feels in the face of a recession, there is still the question of whether or not this rally is on shaky ground. Providing yourself with some downside protection when the market is roaring might sound counterintuitive, but that’s just when you should think about it. Be fearful when others are greedy, as they say…
So, what steps can we take to hedge or minimize the damage of a market sell-off.
Morgan Stanley’s Michael Wilson — among the most prominent bearish voices on US equities — warns the rally in tech stocks that’s exceeded 20% isn’t sustainable and that the sector will return to new lows.
First, I would point out that the Fed’s response to the bank failures has led to a huge injection of liquidity. In the past two weeks, they have reversed half of the $626 billion drained from its balance sheet over the prior year. Meaning, we have gone from Quantitative Tightening back to Quantitative Easing.

An issue giving me concern is the fact Apple (AAPL) and Microsoft (MSFT) account for a whopping 14.6% and 5.1% respectively of the QQQ and SPY market caps. Those are all-time records for two names eclipsing IBM (IBM) and Exxon (XOM) from the late 1980s.
Another cause for concern, in terms of the Nasdaq and S&P 500, only a handful of stocks make a large amount of those indexes. A total of seven companies make up for 51.1% of the Nasdaq and 24.2% of the S&P 500. These are companies like – AAPL, MSFT, AMZN, GOOGL, TSLA, NVDA, META.
If one domino falls, not only does the tech sector fall, but so does the overall market as investors flee these names and spook the rest of the market in the process.
Take away those names and you take away the gains.

Wilson said this rotation is taking place partly because tech is being viewed as a traditional defensive sector, though he disagrees with that thesis and sees Utilities, Consumer Staples, and Health Care as having the better risk-reward profile.
“Tech is actually more pro-cyclical and bottoms coincidently with the broader market in bear markets,” the strategist — who ranked No. 1 in last year’s Institutional Investor survey after he correctly predicted the selloff in stocks.
JPMorgan Chase strategists like Mislav Matejka also said tech “might not be a great place to position structurally anymore.”
The sector will stop strongly outperforming due to earnings risks, unattractive valuations, and very high price relatives in the long-term context, leaving many strategists neutral.
However, many investors who may own those large- to mega-cap names through retirement accounts or broad based ETFs might be reluctant to sell as they not only have a bullish longer term view, but also don’t want to incur tax consequences of closing positions with large profits.
One way to hedge would be to establish a small position in the ProShares Short QQQ ETF (PSQ). PSQ provides inverse exposure to a modified market-cap-weighted index of 100 of the largest non-financial firms listed on Nasdaq.

In this way, we use the heavy concentration of these large-cap tech names to our advantage. It will only take a modest position in PSQ to provide a broad hedge for portfolios that resemble or track the major indices such as SPY and QQQ.
As an inverse ETF, it is structured to move opposite of the QQQ; meaning if QQQ goes up 1%, we can expect PSQ to go down by 1%. On the other hand, if the Nasdaq or QQQ declines by 10% over the next few months the PSQ should increase 10% in value over that time period.
As the Nasdaq and large-cap tech stocks benefit from the fall-out from the financial sector chaos the gains may not be built on solid ground and could be short-lived.
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Today’s stock is one we have been watching for a while, but we wanted to revisit this stock as it is approaching a major level. If this level is exceeded and held we are expecting another large move. However, with this stock being heavily tied to the crypto market, which is currently also in an uptrend, we believe this stock not only has a good shot at breaking this resistance level but even exceed it with a sustained rally higher from there.
But first, the stock needs to break and hold the line here. Microstrategy (MSTR) still has a large Bitcoin holding after the company spent a large sum of money buying up the digital asset and with the crypto market rising, it should translate to rising prices of this stock.
The level to watch here is 300. As you can see on the chart in the below video, this level has been a point of contention several times in the past. Each time the price has approached this level, price has reacted quite significantly. This time, with the stock and crypto market running like they are, we are looking for this level to be broken then retested.
This retest does two things for us:

It lets us determine if the move is valid
It gives us a better risk vs. reward for our entry

If the level is broken and we immediately take the trade, or make the trade in anticipation of this move, we are vulnerable to being faked out. However, if we remain patient to see how this move will play out, we can determine if the move is valid, and if it is, we can wait for this resistance turned support level to be retested. If it holds then we can enter a trade in anticipation for the move to be valid and continue. Watch my video breakdown below for more!
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When you join The Profit Machine, you’ll learn all about my favorite stocks, setups, strategies, and plenty more. The best part, you’ll receive all my trades every step of the learning process, so not only will you get a world-class education, but you’ll also earn while you learn.

Get a jump start on your options education and put yourself in position to win in 2023. Sign up today! Until then…
Good Luck With Your Trading!
Christian Tharp, CMT