Last week’s trading action for the NASDAQ was, well, disappointing. The index was set up to move higher but couldn’t find the energy to move through resistance at 13,600. It’s not what we wanted to see. Then, sellers took over and pushed the NASDAQ below 13,000. Again, not what we wanted to see.
But it’s not all bad with the NASDAQ falling short at a common point of 13,000. The most recent low was higher than the previous cycle’s low mark. What appears to be developing is an upside-down triangle with a flat top and an ascending hypotenuse (the long side of a triangle).
This sort of price action is considered consolidation. In other words, Wall Street is uncertain and is unwilling to commit to the bullish or bearish side of the tape right now. Experience says the pattern of rallying to 13,000ish will continue to the upside followed by shallower dips of profit taking.
Not too long from now, as you see on the chart below, the two lines will come to a point or close to it. When they do, Wall Street will likely pick a side and stocks will trend in that direction afterward. From experience, more often the flat line is the one to break and the markets head in that directions. In this case, the flat line is on top and breaking through it would be bullish for stock prices.
The first quarter for companies on a calendar year ends on Wednesday. First quarter earnings season will begin in earnest around tax-time, April 15th. This year’s first quarter earnings guidance will have more importance than any since 2008. Companies will provide their view of the post lockdown COVID recovery and their forecasts will likely carry a lot of weight in terms of where the market goes next.
According to FactSet, earning expectations are high with the S&P 500’s bottom line increasing 23.3%, which would be the highest year over year rate since the subprime meltdown. (1)
In light of heightened expectations, it’s not too surprising to see Wall Street take a wait and see approach as the first quarter comes to a close. It won’t be long before consolidation gives way and prices bust out of the triangle, be it up or down. The break should be in the direction of Wall Street’s next trend.
If you need further proof that Wall Street can’t pick a side, look no further than sector performance for the last few weeks. When things are cheery, buyers bid up growth stocks and technology fills the top of the leaderboard. When sellers put the market in a down mood, it’s cyclical, interest rate sensitive stuff like oil, banking, and utilities move forward. They are opposites. Last week it was the banks, energy, and utilities that dominated our sector watchlist.
We will wait for the market to tell us which way it is going next and which sectors are likely to drive the move before adding more exposure.
Without a sense of what Wall Street wants to do, it’s been our experience that prudence is the best option. We will stay on the sidelines and wait for the next trend to begin instead of guessing.