Editor's note: Volatile markets pave the way for opportunity... And no one knows how to navigate those opportunities like our colleague Greg Diamond. In this piece, adapted from his Weekly Market Outlook on November 14, he explains why a massive inflection point is about to transform the markets...
The market is starting to price in peak inflation...
Does that mean stocks will rally across the board without any volatility?
No. In fact, we're likely to see a lot of volatility in early 2023.
It could get choppy – with significant back-and-forth action – as bulls and bears battle in the new year.
However, today, I'm going to outline a technical signal that doesn't come around often...
The market is in the process of producing that signal, but it takes time. And we know that in trading and investing, timing is everything.
Back in October 2022, I made a key bullish call, with a few caveats...
Mainly, I noted that some indexes (like the Nasdaq Composite Index) or some stocks (like those in the semiconductor sector) could make new lows.
We've seen that with Software as a Service business DocuSign (DOCU), digital-communications company Twilio (TWLO), global semiconductor manufacturer Taiwan Semiconductor Manufacturing (TSM), and even with Big Tech leaders like Amazon (AMZN)...
These are the market "laggers" – companies that are falling short when it comes to technology, process, and workplace innovations compared with market "leaders."
On the bullish side, construction-equipment giant Caterpillar (CAT) and global finance leader JPMorgan Chase (JPM) are not likely to make new lows... They're market leaders, based on the areas outlined above.
This is the setup to watch in early 2023... It presents the rare signal I want to highlight – price divergence.
Price divergence occurs when the price of an asset moves in the opposite direction of another asset that was once highly correlated with it, but isn't anymore (hence the divergence).
This divergence can create opportunities when the market reverses course and money pours into (or out of) stocks.
We see it at the market tops – and we especially see it at the bottoms. But again, price divergence takes time to develop. Once some of these lagging tech stocks hit their final bottoms, we'll see stronger stocks make higher lows.
That would mark a key inflection point... It's the signal you want to buy – and buy aggressively.
So, let's discuss some of these stronger stocks to watch... And let's be prepared to buy when the time is right.
The first one I'm watching is JPMorgan Chase (JPM). It's among the market leaders for good reason... The biggest U.S. bank is sitting on $1.2 trillion in cash.
I've said this often, and I'll repeat it again and again... When the banks are in a strong position, the overall stock market is doing well, too.
Let's look at the price action of JPM...
This chart illustrates a few things... First, JPM is trading above its 200-day moving average (200-DMA), a measure of the long-term trend.
It also broke two significant downtrends (marked by the blue dashed lines), and it's now trading above two important swing highs (the red circles).
This price action has all the hallmarks of a low and the start of a new uptrend.
As I noted at the bottom of the chart, the relative strength index ("RSI") recently hit overbought territory. That means a correction is likely. But good luck shorting the biggest U.S. bank with more than a trillion dollars in its coffers!
In the meantime, we want to watch and see where JPM finds its higher low. This may not happen for a while. But again, timing is important here... and that higher low would be the signal to buy.
The next stock we'll look at is Trane Technologies (TT). This company provides heating, ventilation, and air-conditioning services.
Some might find it boring, but it's a leading stock right now. Take a look...
Like JPM, TT is trading above its 200-DMA. And unlike many other stocks, TT bottomed out in June and is now trading above a major swing high.
TT is in a very strong technical position – especially compared with the major U.S. indexes.
Strong stocks like JPM and TT are not likely to make new lows. That signals the start of price divergence, which will continue developing over the next few months.
Again, I expect to see a choppy, volatile period as the early months of 2023 continue. So while we're looking ahead to the long-term opportunity, be ready to take advantage of that volatility in the short term...
Many tech stocks are likely to make new lows. We can take advantage of that by making short trades, such as buying puts.
Then, over the next few months, we're likely to see a massive inflection point where strong stocks make a higher low and tech stocks finally bottom out. That would be the time to buy aggressively.
I'm excited about this market environment...
Whether you're bullish or bearish, there's plenty of opportunity on the horizon... both in the short term and the long term.
Greg Diamond, CMT
Editor's note: TOMORROW at 10 a.m. Eastern time, Greg will go on camera to reveal a historic market event that's coming in 2023. This rare move has occurred just three times in 25 years. It could mean danger for unwary investors in the near term... But if you understand how to play this setup, you could double your money 10 different times – as he has shown before in similar conditions.
Greg will discuss all the details, including the exact day this move could begin. Plus, you'll learn his No. 1 investment ticker just for tuning in... Sign up to attend for free here.
Some stocks are doing great in 2023 so far. But plenty are still struggling – especially in the tech sector. If you think these beaten-down stocks are beginning to look attractive, think again... Read more here: Two 'Falling Knives' to Steer Clear of Today.
"Stocks suffered plenty of turbulence last year," Brett Eversole writes. It's likely the volatility isn't over yet. However, a year like 2022 tends to set up major outperformance, according to history... Learn more here: Last Year's Volatility Is Setting Up a 20% Rally.