“It takes 10 years to learn from the vineyard, and another 10 years to learn the wine from that vineyard.” — James Molesworth

Metaphors and analogies are powerful teachers and offer behavioral adhesiveness. In other words, the ideas and lessons they present stick in our memory, and can thus more easily become part of our routines. Sports metaphors are everywhere, but I believe this analogy of investors and winemakers is also extremely powerful.

James Moleworth’s perspective introductory quote is based on his career over three decades in the wine industry. Similarly, my own decades as a full-time investor yield a similar axiom. Not as frighteningly long term as his ten-and-ten perspective, but nevertheless, mine is perhaps closer to five-and-five.

If a winemaker can take two decades to hit a really consistent stride and produce top tier wines, investors who aspire to produce consistent out-performance and profits must also embrace a willingness to play the long game. Hence, keep in mind these three essential lessons:

Investors should accept that their initial learning and growing phase will take years. Achieving mastery is worth the effort, but you don’t get vaccinated with that ability in a one-day seminar. You must experience the seasons of the market and appreciate how you react to bullish, neutral, and bearish scenarios. During these years, you are blending disciplines, tinkering with your methodology, and beginning to demonstrate competence. Yes, you are mastering the vineyard. A vineyard of your investments.Next, you move into the winemaker phase. You are harvesting what you learned. Like fine wine, successful investors can only be replicated with age. Of course, you need appropriate grapes to provide your foundation. But with each passing season in the markets, your wine (aka your skill set) will age and mellow, and you’ll begin bottling out-performance and consistent profits. This is very akin to the passage of top-tier winemakers. If you aspire to consistent outperformance as an investor, you too must be willing to take a similar journey. I often paraphrase this quote: “I worked all those years to become an overnight success.”As both an investor and connoisseur of fine wines, I want to assure you that both passages are worth the effort — truly!The third and final lesson is really the umbrella beneath which all this resides. The axiom is simple. Play the long game. Your portfolio will be healthier. Life will indeed be better.“An investor who has all the answers doesn’t even understand the questions. Success is a process of continually seeking answers to new questions” — Sir John Templeton

Sir Templeton certainly played an exquisite long game. Now, here’s a bonus addendum that’s totally separate from the three essential lessons above. Writing this blog has put me in a wine frame of wine! I’ve always maintained that wine journalists such as James Molesworth should teach college literature classes, because they are some of the best wordsmiths out there. These are a few hypothetical examples of how talented writers might describe bottles of vino:

This wine is broad in feel but not lacking in cut.It’s lushness doesn’t sacrifice it’s racy edge.It’s bracing with hints of youthfulness buried there.Expressive waves harnessed in this elixir.A plump kiss inlaid seamlessly within the bottle.It’s overt personae glistens with purity yet lurking beneath is a polished sophisticated racy element.It forms a tensile matrix steep in feel yet laced with bravado.It’s taut and coiled with much energy in reserve.The vibrant bristling core that hasn’t unwound yet.It sings beguiling notes expressing a hedonistic overall manner.

Waiting for a perfect setup—technically or fundamentally—can sometimes be a perfect way to miss an opportunity. The disruptor is market sentiment, as it jumps the gun on an opportunity hoping to be validated well after pulling the trigger.

Case in point: NVIDIA (NVDA) in March 2023. The article NVDA Stock: Waiting For a Big Plunge? warned against buying into strength, as technical indicators signaled a potential pullback while also warning that the depth of a pullback is always unpredictable.

Instead of pulling back to $230 (or $23 after its recent 10-for-1 split), it pulled back to $250 ($25) before market sentiment, again the disruptor, snatched the opportunity that later would be validated by fundamentals.

Viewing a weekly chart, here’s what happened. Take a look at the blue arrow. That was the week of the “dip.”

CHART 1. WEEKLY CHART OF NVDA. See the blue arrow? That was the buy signal last time around.Chart source: StockCharts.com. For educational purposes.

You have to squint to see the blue arrow, which seemed like a significant decision point for bulls and bears at the time. But as investor sentiment wagered on the upside, AI demand clarified that a new “era” of artificial intelligence far outweighs a short-term market opportunity. And so you see what happened.

Is NVDA a Buy Now, or Is the AI Trade Over?

NVDA share prices have fallen hard following the euphoria driven largely by the stock split. Wall Street analysts see limited upside for Nvidia in the near term and have been known to revise their targets.

In the long term, NVDA’s outlook remains positive, due to the growing importance of AI and NVDA’s dominant position in the AI hardware market. So, while short-term gains may be modest, the chipmaker is expected to outperform the market in the long run.

But corrections can turn into downtrends. So, if you are bullish on NVDA, here are the levels to watch. Take a look at NVDA’s daily chart below.

CHART 2. DAILY CHART OF NVDA. NVDA shares are falling. But will the decline remain a dip, or might it cascade into a much stronger downtrend?Chart source: StockCharts.com. For educational purposes.

While the Chaikin Money Flow (CMF) indicates that buying pressure remains positive, it also shows bullish momentum in a steep decline. The Money Flow Index (MFI), a volume-weighted RSI, confirms this reading, showing prices declining from overbought levels alongside a bearish divergence between the indicator and NVDA.

The chart plots an Ichimoku Cloud (kumo) to map out a wider context to anticipate potential support. Here’s what to keep an eye on:

The cloud coincides with the 50% and 61.8% Fibonacci Retracement levels, which generally serve as favorable buying levels if you want to go long.The 50-day simple moving average (SMA), also commonly viewed as a potential support level, is also looking to converge with the 50% Fib level.The 50% and 61.8% Fib levels, along with the top and bottom end of the cloud, also match the two Runaway Gaps, which, if filled, tend to serve as support levels.

In short, the actionable buying range sits between $105-ish and $110. Of course, ultra-bullish market sentiment can disrupt this setup (as it did in March 2023) and send NVDA prices higher and sooner.

On the bearish side, if NVDA falls below $100, there’s a possibility the correction will become an intermediate-term downtrend. What can trigger this scenario? Unimpressive earnings in the next few quarters (its next earnings is in August).

The Takeaway

While NVDA’s long-term outlook remains bright thanks to its stronghold in the AI hardware market, expect near-term weakness. The key levels to watch for potential support are around $105 to $110, with ultra-bullish sentiment potentially pushing prices up sooner. However, if NVDA drops below $100, we could see a longer downtrend, especially if upcoming earnings disappoint. So, keep an eye on those levels and market sentiment to time your moves wisely.

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

In this edition of StockCharts TV‘s The Final Bar, Dave shares charts for Palo Alto Networks, Arista Networks, Adobe Systems, and Fortinet, four tech stocks that are all pushing higher despite major indexes remaining sideways going into Friday’s economic releases. He also breaks down the chart of gold, shares a new way to use the MarketCarpet feature, and analyzes technical patterns for MU, CMG, JBL, and V.

See the new MarketCarpet in fantastic vanilla color scheme here!

This video originally premiered on June 27, 2024. Watch on our dedicated Final Bar page on StockCharts TV!

New episodes of The Final Bar premiere every weekday afternoon. You can view all previously recorded episodes at this link.

How well can the country’s biggest lenders hold out in an economic catastrophe? The Federal Reserve’s annual bank stress test reveals the answer.

On Wednesday (June 26, 2024), the results of the bank stress tests were released. All 31 participating banks, which included big banks, credit card companies, and regional banks, passed the test. That’s good news, especially for those who own big bank stocks; you could get a little bonus in the way of dividends. But there’s more to stress tests than dividend payouts. Let’s dive in.

What Are Bank Stress Tests?

The S&P 500 ($SPX) declined 56.8% during the 2007–2009 financial crisis (see chart below). If the S&P 500 were to decline that much again, consider what that would do to your portfolio.

CHART 1. BANK STRESS TESTS WERE IMPLEMENTED TO AVOID ANOTHER FINANCIAL CRISIS. During the 2007-2009 financial crisis, the S&P 500 declined 56.8%. A similar percentage drop would bring the S&P 500 to around 2400.Chart source: StockChart.com. For educational purposes.

To prevent such a scenario from occurring, the Federal Reserve (Fed) has been conducting stress tests on the country’s biggest lenders every year since 2011. The Fed sets up a hypothetical scenario of a major economic collapse and evaluates a bank’s balance sheet against this scenario. This determines if the bank has enough assets to endure an economic collapse.

No two years are alike. Each year brings a new set of challenges. To accommodate these changes, the stress tests are modified. When the tests began in 2011, many banks failed. Over time, however, more banks have shown their capability to withstand potential economic stresses.

The test was based on a pass/fail model in the early years. That’s no longer the case. Banks must stay above a minimum capital ratio of 4.5% to pass the test. In addition, each bank has a buffer added to that 4.5%, which varies from bank to bank depending on its hypothetical loss. In 2024, a 40% decline in commercial real estate prices, a 36% decline in home prices, and a 10% unemployment rate were factored into the test.

So, if all banks pass the stress test, does it mean everything is hunky-dory? Banks have challenged the accuracy of these tests. After the 2024 test results were revealed, JPMorgan Chase (JPM) stated that, based on its estimates, losses should have been higher than what the test determined. A couple of big banks made similar statements last year.

Another point to keep in mind is that even though all banks passed the test, their capital levels dropped by about 2.8 percentage points. One reason for this is the increase in credit card loans, which all investors should keep on their radar.

Why Should Investors Pay Attention to the Stress Tests?

If the largest lenders—JPM, Wells Fargo (WFC), Citigroup (C), Bank of America (BAC), Goldman Sachs (GS), and Morgan Stanley (MS)—pass the test, their shares could trend higher, and investors could receive dividend payouts. But that doesn’t always happen.

For one example, the Financial Select Sector SPDR ETF (XLF) didn’t move much the day after the test results. In the daily chart of XLF below, Fibonacci retracement levels have been applied to its most recent upward move.

CHART 2. FINANCIAL SELECT SECTOR SPDR ETF (XLF) DAILY CHART. If XLF bounces off its 50% Fibonacci retracement level and clears the 38.2% level, XLF could trend higher. It’s best to confirm the move with other indicators. For example, if XLF’s relative performance against the S&P 500 improves, it would be another checkmark to confirm an upward trend.Chart source: StockCharts.com. For educational purposes.

XLF is hovering around its 50% retracement level and is also underperforming the S&P 500. There’s not a lot there to convince anyone to go long XLF, but that could change. If XLF reversed at the 50% level, moved higher, and cleared the 38.2% level, that may be a good time to lock in some positions. If XLF’s relative performance against the S&P 500 improved, that would be further confirmation that XLF could move higher.

The Bottom Line

Nothing is guaranteed in the stock market, but bank stress tests indicate the bigger economic picture. It’s also comforting to know that big lenders will likely endure a financial shock of a large magnitude. And if you own bank shares in your portfolio, a dividend payout can be something to look forward to, although it may take a couple of months before it shows up.

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

One hallmark of secular bull markets is rotation. When leading stocks, sectors, and industry groups falter, there needs to be others that grab the baton and help to keep the bull market intact. Semiconductors ($DJUSSC) have been the clear leader in the stock market for years, but especially since the end of October 2023, when the group embarked on its most powerful rally of the 21st century. Below is a 25-year chart of the DJUSSC. Pay particular note to the bottom panel, which reflects a 170-day rate of change (ROC), or roughly 8 months. Compare this most recent 8-month rally to other 8-month periods throughout this century:

The 8-month ROC recently hit 115%, which is the biggest rally EVER on this index. And if you look at the price chart, we should at least CONSIDER the possibility that this is a parabolic top. This is how these form – with tremendous amounts of positivity and what could end up being unsustainable revenue and EPS growth. The entire group is being priced off of record revenue and earnings growth and for perfection. Should traders even get a HINT that future growth might be lower than what we’ve been experiencing the past couple quarters, the semiconductor trade could be weak for months, possibly quarters.

In a secular bull market, however, it’s rotation that keeps our major indices in uptrends. Where might the new leadership emerge from if semiconductors do in fact weaken? Well, I think it’s already showing here:

XLC:

A breakout has already been made here. Yes, we’re a bit overbought, but nothing like how overbought technology (XLK) has been. One industry that typically revs up when the XLC is hot is internet ($DJUSNS). This group remains in the midst a major rally:

$DJUSNS:

The red-shaded area highlights the fact that, on relative basis, internet hasn’t been leading the past couple months. The breakout this week, though, might indicate renewed relative strength. It’s also noteworthy that since the financial-crisis low in 2009, internet stocks have been leaders during July, rising in 14 of the past 15 years:

The average July return has been 6.8%, more than double any other calendar month since 2009.

There’s one other key sector, consumer discretionary (XLY), that could play a big leadership role over the second half of 2024. This group has been a drag on U.S. equities, but it really hasn’t been felt that much, because the XLK has been so strong. NOW is the time, however, when U.S. equities could be looking for rotation to and leadership from this sector:

XLY:

Relative strength has begun to turn higher over the past two weeks and this relative strength could be fueled much further by an absolute breakout in the price of the XLY near the 184-185 level.

It’s been amazing what a stock like NVIDIA Corp (NVDA) has done for semiconductors, technology, and our major indices. But if NVDA struggles on a relative basis, which it certainly deserves, I see 3 critical stocks not named Apple (AAPL) and Microsoft (MSFT) that could swoop in and “save the day” for our major indices, especially the NASDAQ 100.

TAG, You’re It!

Ok, so if we’re going to need a replacement, temporary or otherwise, for a leadership stock like NVDA, which stock(s) might we look to for future leadership?

GOOGL:

Relative to its peers, GOOGL hit rock bottom in early March. Since then, GOOGL has been significantly outperforming its internet peers and is currently awaiting another one. From mid-May to mid-June, GOOGL didn’t go anywhere. Semiconductors were flying, but GOOGL took a back seat. Now that it’s latest breakout to all-time highs have occurred, it certainly appears as though GOOGL is well-prepared to take the baton for the next leg of this secular bull market.

AMZN:

I don’t know if there’s a better stock anywhere right now. AMZN is absolutely one of my favorites. Discretionary stocks have been lagging most of the year and AMZN is the top holding in the XLY. AMZN just broke out, after consolidating, on excellent volume and I expect the stock to be a leader during the 2nd half of 2024. AMZN’s best calendar month during this secular bull market (since 2013) has been July – check it out:

AMZN has climbed more often in November, but its actual average monthly performance in July (+7.3%) easily surpasses all other months. So we have technical conditions turning bullish just as we move into, arguably, AMZN’s best month.

TSLA:

Ok, I get it. TSLA’s been disappointing for sure. But there are improvements on the chart that suggest TSLA could be on the verge of a much bigger run. We do need to see one more key price level cleared to give me more confidence of a big rally:

I see rather significant improvement in momentum (PPO), volume trends, and relative strength. TSLA, relative to its auto peers, just hit nearly a 4-month high. This, combined with other technical improvements, tells me that we could just be getting started here. I do want to see gap resistance near 208 cleared, because after that, I don’t see any major resistance until 265 or so.

There’s one more thing to like. Over the past 6 years, June, July, and August have posted AMAZING average returns. This time of the year is when TSLA has really shown extreme absolute and relative strength. Check out this seasonality chart:

The average return during June, July, and August has been a STAGGERING and BLISTERING 43%!!! That’s the AVERAGE since 2019. So if TSLA is going to get the job done, history tells us that NOW is the time.

Remember, the sustainability of secular bull markets is not much different than the game we all played as kids. Hey AMZN, GOOGL, and TSLA! You’re IT!!!!

I published my first StockCharts YouTube video in quite awhile and it’s great to be back! I spent a lot of time discussing the beauty of secular bull markets and how rotation keeps them alive, providing areas to keep a close eye on for future leadership. Please be sure to check out the video HERE and also be sure to hit that “Like” button and “Subscribe” to the StockCharts YouTube channel! I’d really appreciate the support!

Happy trading!

Tom