What is the stock meme Reddit investors said with GameStop Corp. (GME)? Oh yes, straight to the moon. From the message boards to the trading floors as the indexes have gone vertical since pivoting higher in late October.
As we mentioned in our last get-together, we are looking for three things to confirm a change in direction from down to up. We got one of them last week. The NASDAQ busted through the descending trendline connecting cycle tops (see the chart below).
That leaves two to go.
First, some profit taking that stops above the October low. Considering the swiftness of the recent run, a whiff of weakness and sellers could line up to cash out short-term gains. When the selling starts, it’s our opinion that it will likely come to an end long before the NASDAQ drops below 12,600. We can see the 50-day moving average on the short end and 13,000ish if selling goes deeper.
Confirmation of a new uptrend would come when traders take the NASDAQ higher than its most recent peak, which is 13,800 as of now, but subject to be higher. Based on our experience, we’d expect confirmation to come if there is a higher low following a trend break as outlined above. Of course, nothing is for sure with stocks, but at the very least we’d have a sense of where to get out if the market double crosses investors.
For now, we’ll be on the lookout for some profit taking followed by a pivot higher before the 200-day average. Index investors might consider an index exchange-traded fund (ETF) like Invesco QQQ Trust (QQQ) if/when that happens.
When stocks roll like they did last week, it’s to be expected that QQQ will outperform SPDR S&P 500 ETF Trust (SPY). That’s exactly what happened, which is positive for stocks in our view. Adding more kindling for the fire, Technology topped our performance leaderboard. Again, to be expected when stocks are the strongest.
If we get the sell and rebound as we hope to see, industry/sector investors might consider a tech ETF like Technology Select Sector SPDR Fund (XLK). The fund includes companies from technology hardware, storage, and peripherals; software; communications equipment; semiconductors and semiconductor equipment; IT services; and electronic equipment, instruments and components. A well rounded, diversified tech fund.
We aren’t ready, just yet, to add an idea here. However, we have the feeling we are close. Once again, if we’ve made the correct call and stocks dip and reverse higher, then we will have something in this spot for the first time in a while.