Bears continued on Friday to spit out teeth, states Jon Markman, editor of Strategic Advantage.

They were repeatedly punched in the mouth last week as traders began to bet that the Federal Reserve was finished raising interest rates. The Nasdaq 100 index closed at 15,099, a gain of 1.2%.  The rally for the benchmark was the capper for a weekly gain of 6.5%. The Nasdaq 100 is now up 38.4% in 2023, and professional money managers who are paid to keep pace are freaking out. They don’t want to own tech stocks at these levels. They are too concerned about a 2024 corporate earnings recession, or the impact of higher interest rates on purchases of new iPhones. Yet, they are behind, and they need to catch up. 

Enter smaller stocks. The Russell 2000 tracks shares of smaller capitalization businesses. Bears have been relentless short sellers of these firms under the assumption smaller businesses have the greatest exposure to the inevitable slowdown in consumer spending. Reports from the Labor Department last week on hourly wage growth and payrolls depicted significant slowness in the economy. The economy generated only 150,000 new nonfarm payroll jobs in October, 20,000 fewer than expected. 

Bond yields collapsed and the most heavily shorted stocks surged. The Russell 2000, an index that has been targeted by bears, was up on Friday by 2.7%, and 7.6% for the week. Pros see the outperformance as an opportunity to catch up with their benchmark. They are now piling into small issues. 

Don’t be surprised if bears try to regroup in the early part of next week, though. The rally last week was extreme and selling Friday ahead of the weekend trimmed intraday gains significantly. There is support for the NDX at 14,720, the rising 20-day moving average. Expect buyers at that level. Resistance is 15,333, the October high.

Our NASDAQ Trading Model: Our timing model is now bullish and recommends buying the first pullback of the $NDX to its 20-day moving average via the double-leveraged fund ProShares Ultra QQQ (QLD). Here’s the order: Buy QLD at $59.56 lmt gtc. If filled, set the target at $68.00 lmt gtc and set a stop at $53.00 stp, effective after 11:00  am ET only. The QLD closed Friday at $61.85.

Learn more about Jon Markman here...