There is a constant stream of market critics who love to talk down the rally and how its longevity isn’t justified or rational.
Those naysayers crow about lofty valuations, China tensions, big taxes coming if the Democrats sweep the elections, social unrest, another surge in the pandemic or a combination of some or all these risks. It goes without saying this is the most unloved rally of all time.
The V-shaped recovery for stocks left scores of investors waiting for the quintessential retest of the March lows that was guaranteed by all the smartest market technicians in the industry. It never happened.
The coronavirus forced a nationwide shutdown of businesses and consumerism, casting the economy into a short-term tailspin that had the bears sharpening their claws. Finally, the shorts would cash in for billions in downside profits as the economy nose-dived into a deep recession. It never happened.
What did happen was that the power of the Fed swept over Wall Street with the promise of eternal quantitative easing (QE) accompanied by huge spending bills passed by Congress, and the market never looked back. During the month of June, the market consolidated the torrid gains off the March low and rallied unchecked until this past week when the rally hit pause.
Businesses learned how to survive and thrive in a pandemic economy. Plus, 84% of S&P 500 companies beat earnings estimates. So much for high-priced stock analysts and pretty unimpressive for those who are supposed to have the inside track from all their privileged “channel checks” not available to the retail investor.
What is most encouraging is that despite the lingering impact of COVID-19 that continues to hamper everyday life for most of the country, the economy just added 1.4 million jobs in August, with the Jobless Rate diving to 8.4% when economists were looking for a number closer to 10%.
The strong jobs numbers followed reports of stronger-than-expected Factory Orders for July. ISM Manufacturing Index for August and blowout numbers for new and existing home sales, thanks to historically low interest rates. These data points set the tone for what is shaping up to be a glorious third quarter where gross domestic product (GDP) could bounce back by as much as 25%, given the forward guidance of so many CEOs foreseeing a big uptick in business.
The U.S. economy is like a coiled spring. Companies have gotten leaner and meaner during the past five months. Similar to when the economy emerged from the 2008-2009 Great Recession, earnings growth exploded higher by 50% on only a 10% recovery in revenue growth. The same will be true again this time around, with the S&P likely taking out the previous high by early October heading into the third-quarter earnings season.
There will be a short and fierce rotation into the industrial, value and epicenter stocks that have lagged the pure growth stocks. In fact, the rotation began this week, and it should not surprise investors if big-cap tech spends the better part of September consolidating the heady gains. But come late September and early October, traders and investors should consider getting fully exposed to the leading stocks that dominate 5G, cloud computing, mobile ecommerce, fintech, big data, artificial intelligence (AI), virtual reality (VR), robotics, augmented reality, electric vehicle (EV) technology, cybersecurity, work-from-anywhere software and next-gen chips.
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The rally in tech may be taking a breather, but technology remains the juggernaut of economic progress in the United States and the world with the very finest of companies calling America their corporate home. We trade Microsoft Inc. (NASDAQ:MSFT), Qualcomm Inc. (NASDAQ:QCOM), Advanced Micro Devices (NASDAQ:AMD) and other blue-chip stocks that are the center of attention. We steer clear of second-tier names, and only recommend the leaders.
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