If you watched the movie Jaws, you remember the ominous music foreshadowing the killer shark attacks. Dunt, Dunt, Dunt, Dunt… starting out faintly at a slow pace and accelerating in intensity. Even though you knew the great white was about to strike, it didn’t stop you from jumping out of your seat.
A saying emerged from the movie, just when you thought it was safe to go back in the water… it’s not safe because another Jaws lurks.
That’s sort of how we feel about the stock market. We got head faked last week with the NASDAQ closing below 15,000 with our momentum models pointing lower. Our expectation was stocks would go lower since the index has done nothing but go straight up.
The NASDAQ rallied to a higher level than the previous rally; the index moved to the better side of its 50-day moving average; relative strength is pointing higher and gaining; momentum has moved into the plus column; a few technical measuring sticks triggered buy signals.
Wall Street is saying it’s safe to get back in the water. Yet, Dunt, Dunt, Dunt, Dunt… echoes in the background. Our concern is another head fake, jump in only to get bitten by a selloff. Dunt, Dunt, Dunt, Dunt plays in the background because declining volume accompanied the aggressive move higher. The combo is not a confidence builder.
Normally, we want to see the initial surge fueled by rising demand. At the very minimum, we want to see flat volume. Maybe, we are wrong here, but we are going to live by what we’ve learned during the last 30+ years. As a mentor put it, “it’s better to be out of the market wishing you were in than in the market wishing you were out.” In other words, losing money sucks more than making money feels good.
Most market metrics suggest stocks could push higher to close out the year. Nonetheless, we are not fully confident that it’s safe to go back in the water.
A wide variety of sectors/industries performed well in the last week, not surprising with every day in the plus column. Invesco Dynamic Leisure and Entertainment ETF (PEJ) was the top performer despite Omicron concerns. Transportation, Semiconductors, Energy, Healthcare, and Aerospace made up the rest of the top 10.
SPDR S&P Transportation ETF (XTN) has one of our favorite charts from last week’s list. We’d like it even more following a pullback.
We don’t want to be weighed down by a hesitant feeling when adding new individual stocks. Whenever we enter a position halfheartedly, it seems to fail more often than not. We’ll just play it safe and watch from the sidelines.
Happy New Year and let’s hope 2022 brings and end to COVID and a stellar year for stocks!