Pictures paint a thousand words is a tired cliché’ – no? It’s time to freshen it up a little and put a market spin on it, what do you say? Let’s try this, understanding pictures can pay thousands of dollars. For market players, it’s a unanimous upvote.
The picture the NASDAQ is painting doesn’t require a thousand words to interpret what you see or how the artist makes you feel. No, it’s much more straightforward than that this week.
It’s a picture of the index beginning to walk up the stairs, starting off with a higher low and hopefully a higher high to come. A classic piece of technical work and the definition of a trend reversal. If Wall Street can close the NASDAQ above 13,630-ish, we will have a higher high and most likely confirmation that the index could challenge its recent 52-week high.
As we always do, we also have to keep in mind the risk scenario. Should bulls fail to deliver and bears close the NASDAQ below 13,000, then another trip to 12,500 might be on the itinerary. Based on moving averages, volume trends, and experience, we put it at 70/30 bulls win and push their way past the 13.6 barrier.
If that’s the correct call, index investors might benefit from an index exchange traded fund like Invesco QQQ Trust (QQQ). More aggressive types might use leverage to their advantage with something like ProShares Ultra QQQ (QLD). Its objective is to double the daily return of the NASDAQ 100. In other words, if the NASDAQ gains 1%, then QLD is expected to rise 2%. Of course, the opposite is true. If the NASDAQ drops 1%, then QLD investors can expect to lose 2%.
Not much in our watchlist managed to stay above water last week. Just homebuilders and communication services were barely in the green. Home prices are rocking for sure. As such, builders will build as many as they can as fast as the can to take advantage of the current conditions. However, SPDR S&P Homebuilders ETF (XHB) is a tad overbought at the moment. It might be wise to wait for a pullback to get in.
If the NASDAQ can break through, as we detailed above, then we’d still want to focus on tech. Last week we did software. This week we’ll do SPDR S&P Semiconductor ETF (XSD). There is a major chip shortage right now, which means prices should lead to big margins and fat profits.
After analyzing some key fundamental metrics and the stock charts of the 42 companies in XSD, Qorvo, Inc. (QRVO) appears to offer the best combination of earnings and sales growth, valuations, internal metrics, and chart technicals.
The Mobile Products, Infrastructure and Defense Products chip maker sports a return on equity of 21%; trades at 18 times cashflow (on the low end for the XSD portfolio); is valued at 5.42 times sales (again on the low end); and has some of the lowest forward price to earnings ratios for this year’s, and next year’s estimates. Qorvo’s stock chart shows it close to busting out to new highs with building momentum.