A relief rally is to be expected after the NASDAQ got whacked last week. The index was showing signs of hope before making its third, lower high in a row. The stepping down action is partial confirmation that the downtrend, which began in mid-July, is likely to continue.
It’s only partial because Monday’s rally prevented the NASDAQ from closing with a new, cycle low. Although, the intraday low did penetrate support at 13,000. A close below support would complete confirmation; however, stocks could be on the edge of full compression with the NASDAQ’s 200-day moving average about 300 points below.
The key, longer-term, technical benchmark is likely to attract some buyers as the NASDAQ approaches the 200-day line of 12,744 and rising. We saw that to start the week as the index flirted with the 200-day with an intraday low of 12,848.83.
Generally speaking, the 200-day moving average is the cutoff line between bullish and bearish. It’s positive for investors when the indexes trade above the trendline and negative when it’s below. A quick trip below the red line on the chart below won’t do much to market sentiment, but an extended stay would likely damage market psychology.
For now, the odds favor more downside despite Monday’s pop. It would not be surprising to see continued recovery in the days ahead, but it’s our opinion that the NASDAQ will make contact with the 200-day average in the near future. Investors might consider raising some cash by selling underperformers if the index approaches 13,400ish and reallocating the money into leadership stocks when Wall Street pivots higher.
SECTOR VIEW
For the second week in a row, SPDR S&P 500 ETF Trust (SPY) outperformed Invesco QQQ Trust (QQQ). It might be better said the SPY didn’t do as poorly as QQQ, down 3.41 percent versus 4.01 percent respectively.
It’s been our experience that weakness is the way when the S&P 500 tops the NASDAQ 100.
Only three index/sector exchange-traded funds (ETFs) managed to finish above water last week and two of them were energy related, Energy Select Sector SPDR Fund (XLE) and SPDR S&P Oil & Gas Exploration & Production ETF (XOP), with iShares U.S. Medical Devices ETF (IHI) atop our performance leaderboard.
With our technical scale tiling towards more downside than upside potential at the moment, we’ll pass on adding an index/sector ETF as a potential buy target.
STOCK VIEW
As long as our analysis favors team red over team green, we’ll avoid individual stocks. Why buy a mattress before any holiday when you know they’ll be on sale for New Year’s, Presidents’ Day, Memorial Day, Independence Day, Labor Day…
We should be able to uncover some good value when Wall Street turns around.
Rich Meyers