2 Reasons Stocks Might Slide Soon

Getting into the weeds by defining zillions of technical signals and how to interpret them doesn’t make for good content. It’s quite boring. Instead, we like to focus on the potential impact of what we see and let the picture (chart) do the explaining.

There are couple of reasons to believe stocks could be in for some short-term weakness. The NASDAQ’s relative strength reading index has crossed above 70, again. That’s the rule of thumb level where indexes/stocks/ETFs… first hit an “overbought” condition. As you’ll see on the chart below, selling tends to begin not long afterwards.

We also have a potential short-term top signal. It sort of looks like a “Top” that kids spin. A large upper body with a skinny tail and top. Much like a high relative strength score, a spinning top is usually followed by some weakness. You can see both here.

It’s our opinion that any profit taking would likely be seen as a buy the dip opportunity due to the strength of third quarter earnings’ reports. Although, the bullish beat rate is the second lowest since the COVID recovery began.

So far, 276 of the S&P 500 companies released their quarterly financial report cards with 223 (80%) topping Wall Street’s expectations, according to S&P Global’s Howard Silverblatt’s S&P 500 EARNINGS AND ESTIMATE REPORT. (Google and bookmark the excel sheet as it is a great resource.) Since the second quarter of 2020, only last year’s fourth quarter produced a lower bullish surprise rate.

Nonetheless, profits should be strong enough to keep stocks afloat, in our view.

For now, investors might consider exercising some caution in the near term to see if a high relative strength reading turns stocks red in the next few days. As mentioned before, any downturn shouldn’t be too long lasting but, as always, we’ll look for a pivot higher with confirmation before any declarations.

SECTOR WATCH

For the third week in a row, technology exchange-traded funds (ETFs) own the majority of last week’s top performance spots on our industry/sector leaderboard. However, last week’s pick in this space, First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN), was far and away the top performer, up more than 7% since. It remains our favorite chart and there is no reason to double up, especially if weakness could be on the horizon. Investors who missed last week’s move might wait to see if QCLN and the overall markets slide in the next few days to week.

STOCK WATCH

We invest based on our market outlook and expect some weakness soon. With that as our operating model, we’ll wait to see if some of our favorite names get cheaper.

Rich Meyers
Investing Trends