Last week we were concerned the markets could be headed lower thanks to inflation concerns. Stocks did drop aggressively before rebounding a little on Friday. Wall Street lost ground to start the week but recovered from the day’s lows before the closing bell.
Unfortunately, the little bit of buying did not change the overall tenor of the market from our viewpoint. We are in a downtrend and have not identified a pivot point yet. Yes, the NASDAQ reversed course at 13,000, which could end up being the bottom, but it has not been confirmed as of yet.
Wall Street’s algorithms could trigger selling if the NASDAQ finds its way to 13,600. It’s close to the index’s 50-day moving average and is a clear line of resistance. Additionally, the NASDAQ’s most recent pattern has been a wave of selling followed by a rally, and then a second wave of selling that stops before reaching the first wave’s low.
A higher pivot point tends to be the first signal that a downtrend is running out of steam and a new uptrend is possible. It’s what we are looking for. On the other hand, if the NASDAQ closes below 13,000, then there is a strong likelihood that the index will test its 200-day moving average, which could be close to 12,600 by the time the two meet.
For now, we want to see which scenario plays out before returning to a bullish posture. In our opinion, until a clear reversal is in place, there is more risk to the downside for the NASDAQ than there is reward to the upside.
If the NASDAQ closes below 13,000 before we meet again, investors might consider adding ProShares Short QQQ (PSQ) to their portfolio as a hedge against downside. The exchange-traded fund’s objective is to return the opposite performance of the NASDAQ 100 on a daily basis.
Medical, pharmaceuticals, bio-techs, and banks were the best performers on our sector scoreboard. However, with the overall direction of the financial markets in limbo, investors might be wiser to wait before adding more money to the market. Why invest in something today that could be cheaper in a week? Living by the axiom, “it’s better to be out of the market wishing you were in than in the market wishing you were out” has done us well in the last 25 years. We see no reason to abandon it now.
Until there is an identifiable pivot point higher, we’ll stay on the sidelines here too.