As we thought might happen, the NASDAQ hit the gas after getting the technical green light. For the last few weeks, the index was flirting with resistance at 12,250 but Wall Street kept putting it in reverse when hitting the technical speed limit.
When bulls finally got an open lane, the NASDAQ rallied close to 500 points in a nine-day span. While we see more to go, potentially to 13,000-13,100, the recent move might be a touch too much, too quickly. The NASDAQ’s Relative Strength Index (RSI) score currently stands at 69.42. As a general rule, a RSI score of 70 or more is thought to be “overbought” and usually attracts some profit taking.
Under the current situation, we’d see it more as a buy the dip opportunity, especially since 12,250 was so hard to break on the way up. Many times, stiff resistance going up flips roles and becomes solid support on the way down.
However, we will point out that the last time the NASDAQ went above a 70 relative strength reading, profit taking turned into a six-week selloff. And, who knows what might happen if Congress and the White House don’t reach an agreement on the debt ceiling. We suspect that Wall Street would throw a fit and send a message with an aggressive run lower.
For now, we’ll work under the theory that stocks are likely to shed a little in the near term as the NASDAQ moves into extended territory. Index investors that missed the most recent run might consider using weakness as an opportunity to consider Invesco QQQ Trust (QQQ) in the event that buying a dip is the correct call.
QQQ continues to outperform SPDR S&P 500 ETF Trust (SPY), which is confirmation, in our view, that stocks could continue to move higher.
Technology and Banks were the best performers last week. It’s not surprising considering tech has a high correlation with the NASDAQ. As the NASDAQ goes, typically so goes technology. It’s also not surprising to see small/regional banks rebound as it’s believed the Federal Reserve is likely to pause interest rate hikes.
Much like our viewpoint on the overall market likely taking a dip, sector/industry investors might consider technology exchange-traded funds (ETFs) on price weakness. SPDR S&P Semiconductor ETF (XSD) might be worth a look if it drops back to $189ish.
Since the NASDAQ is borderline overbought, it might be a better option for investors to add to their strongest performing tech stocks during the recent run versus adding anything new.