OVERVIEW
Will The Fed Cut Rates Again?

The stock market is coming off a sluggish week, with most sectors pulling back and market breadth starting to thin out. The S&P 500 dipped 0.6%, marking declines in four of the last five sessions. Meanwhile, the Nasdaq managed to eke out a small 0.3% gain, standing out as the only relatively strong segment. However, even within the tech-heavy index, cracks are beginning to show—a trend we’ll dive into later.

After a broad-based rally earlier this year, the market has shifted into a much narrower, tech-led move. Breadth—the number of stocks participating in the rally—is has been fading fast, and we’re seeing gains become increasingly concentrated in just a handful of names. While this type of narrow leadership can continue for a while, the big question is how sustainable it really is as we head toward the end of the year.

A key indicator of this shift is the percentage of stocks trading above their 20-day moving averages (MMTW), which has fallen sharply this month. After hitting an extended high of 75%, it’s now below 40%, signaling that the majority of stocks are in either late-stage distribution phases or outright markdown trends. But this doesn’t tell the full story. Historically, when breadth drops to levels between 45% and 30%, we’ve often seen reversals kick in. If that trend holds, we could start seeing breadth stabilize and push higher as soon as this week—though much of that depends on the Federal Reserve’s upcoming policy decision.

The Fed will announce its next move on December 18, with a 0.25% rate cut almost fully priced in. While this decision is expected, what comes next is much less clear. Any adjustments to the pace or size of future cuts could significantly sway market direction. As of now, the CME FedWatch Tool shows a 96% probability of a quarter-point rate cut, leaving just 4% odds for no change.

With thinning breadth, narrow leadership, and a key Fed decision on the horizon, this week could play a pivotal role in shaping how the market closes out the year. However, with the probability of a rate cut already so high, there’s a risk of significant disappointment if the Fed decides against cutting rates or if Fed Chair Powell's comments strike a more hawkish tone than expected.

Nasdaq

The Nasdaq finished Friday’s session with a green doji candle on high relative volume. While this suggests some buying interest, it’s typically not the strongest signal in a firm uptrend, as it indicates profit-taking and sellers stepping in, anticipating that the rally may not be sustained. However, demand remained strong, as evidenced by the QQQ finding solid buying support around $528 during the intraday pullback, preventing a deeper move down to test the rising daily 10-EMA.

As we’ve mentioned before, the QQQ remains the strongest index, particularly for those with exposure to the names it tracks, like Tesla. However, a low-participation rally like this is not sustainable in the long run. The QQQ is vulnerable to a sharp pullback if money starts rotating out of the outperforming sectors or if the market breadth stays narrow and only the mega-cap tech stocks continue to drive the rally. Both scenarios point to an unhealthy market structure, and this raises concerns about the longevity of the QQQ’s strength in the current environment.

S&P Midcap 400

Midcaps are continuing to struggle, barely holding onto their last remaining demand zone before testing the rising 50-EMA at $590 for the first time since early November. The past two weeks have been particularly tough, with the MDY showing no signs of demand stepping in to end the ongoing pullback. Until we see a clear change in character, midcaps should be considered a definite avoid.

The best-case scenario for the MDY at this point would be for it to consolidate and build some sort of sideways base around the current $598-$601 level, which also serves as a psychological zone. For any hope of a quick recovery, this level would ideally need to hold. Without that, the downside risk remains elevated, and it’s hard to justify a bullish stance on midcaps in this environment.

Russell 2000

Small caps are continuing their downtrend, with relative volume picking up since December 9th, and price action accelerating lower. The IWM recently broke below its 10-EMA and 20-EMA on the daily chart, and the 10-EMA is about to cross below the 20-EMA, signaling a short-to-medium-term downtrend. With the 50-EMA at $230, a key demand level, fast approaching, we need to see some aggressive buying to slow down this downward movement in the Russell 2000. Until that happens, downside risk remains elevated, and small caps could continue to face significant pressure.

Both the MDY and IWM are overdue for some relief, so they’re areas to watch closely, especially since the best breakouts and long opportunities often come after drawn-out pullbacks and corrections. However, it’s crucial not to try to anticipate relief. You must be able to recognize a change in character and only enter once you see confirmation from multiple setups forming within the stocks tracked by the Russell 2000 or S&P Midcap 400. Patience and confirmation are key to navigating these markets successfully.

DAILY FOCUS
Ignore the Noise: Where Is Money Flowing?

The market is sending mixed signals, with many stocks either pulling back or forming potential setups. In this environment, it’s crucial to focus on the leaders—those stocks that consistently outperform the broader market. Identifying these leaders is key to navigating the current landscape successfully.

Bitcoin’s strength is one of the standout themes. With Bitcoin firmly holding above $100,000, we’re seeing a surge in interest across crypto-related equities, making them one of the most exciting areas of focus right now. As Bitcoin shows continued strength, crypto stocks are likely to keep gaining momentum.

Additionally, while FAANG names continue to lead, stocks like Broadcom (AVGO) are making strong moves, even as semiconductor ETFs (XSD & SMH) underperform. This highlights the need to be very specific in your stock selection. There are opportunities in select stocks, but not every name within a sector will perform the same.

To uncover the leaders in the market, you need a systematic approach. Start by identifying the top-performing sectors or industry groups. Focus on those that are outpacing the broader market and showing strong relative strength. From there, you can drill down into the individual stocks within those groups and find the ones leading the charge.

1. Identify Leading Sectors/Industry Groups:
   Look for sectors or groups that are outperforming the broader market. Use relative strength indicators or just evaluate the performance of each sector/group over the last e.g. 3 months and compare this to a benchmark like the SPY or RSP to assess which sectors are showing the most momentum. For example, if the tech sector is outperforming the market over the last 2 weeks whilst the S&P 500 has been struggling, zoom into the top 5% of stocks within that sector.

2. Scan for Top Stocks Within Leading Sectors:
   Once you’ve identified a sector or industry group that’s leading, scan for stocks that are outperforming within that space. Aim to find the leading group of stocks based on performance over the past few weeks or months. These are the names that are most likely driving the sector’s strength and could continue to lead.

3. Use Filters to Narrow Down:
   Apply filters to identify stocks with the greatest growth potential and momentum:

   • ADR (Average Daily Range) > 3%: Look for stocks with high volatility, which typically indicates momentum. An ADR above 3% suggests a stock that is likely to move with significant swings, ideal for active traders.

   • Quarterly YoY Revenue Growth > 25%: This indicates companies with strong top-line growth, signaling demand for their products or services. Sustained revenue growth is a positive indicator for continued strength.

   • Quarterly YoY EPS Growth > 25%: High earnings growth is critical to identifying stocks with robust profitability. A company that consistently grows earnings year-over-year shows operational efficiency and the ability to drive long-term value.

   • Price Action and Technical Indicators: In addition to the fundamental filters, look for stocks that are showing solid technical setups, such as breaking through key resistance levels or forming bullish patterns like bull flags or consolidation above key moving averages (e.g., the 10-EMA, 20-EMA).

4. Check for Liquidity and Volume:
   Ensure that the stocks you are focusing on have enough liquidity. Look for stocks with high average volume to confirm that the price moves are supported by sufficient trading activity. Stocks with tight spreads and consistent volume are ideal for entering and exiting positions smoothly.

WATCHLIST
Some Explosive Momentum Plays

MVST: Microvast Holdings, Inc.

• MVST remains a standout momentum burst play in the market. This advanced battery technology company delivered an impressive +340% move following its earnings gap-up on November 13th, driven by stellar results: year-over-year quarterly EPS growth of +267% (a +225% surprise) and sales growth of +27% (a +2% surprise).

• Currently, MVST is consolidating along its daily 10-EMA, showing strong demand during intraday tests of this rising level. As price action tightens, the $1.32 resistance level—already being tested in pre-market—is emerging as a key breakout zone. We’ll be closely monitoring relative volume and the 5-minute opening range high for a potential 3-5 day momentum burst play.

• It’s crucial to approach high ADR (Average Daily Range) names like this—with over +25% ADR—with caution, as they can be challenging to trade. We always recommend limiting risk to a maximum of 0.25% of NAV and prioritizing scaling out before holding positions overnight. This is especially important if the breakout shows strong follow-through, as overnight exposure in these small-cap momentum plays can lead to sharp gap-downs that significantly impact your position.

MSTR: MicroStrategy Incorporated

• MSTR has solidified its position as the "Bitcoin King," now owning over 2% of the total Bitcoin supply. With Bitcoin comfortably trading above $100,000 (currently at $104,000), it’s no surprise that we’re keeping a close eye on all crypto-related equities for potential moves.

• Out of the group, MSTR stands out as the most attractive play. The stock is forming a textbook multi-week bull flag on the daily chart, riding its 10- and 20-EMA with volume steadily drying up. Adding to the setup, volatility has tightened significantly over the last three sessions, signaling potential for a breakout.

• In fact, MSTR is already breaking out in the pre-market, making it one to watch closely for further momentum.