We’ve all heard the saying, “If you don’t have anything good to say, don’t say anything at all.” Ok, that’s it for this week’s newsletter…
Monday’s stock market action was not encouraging as the NASDAQ set a new, current trend low. Standalone, that’s not bothersome. What is concerning is something we touched on a few weeks ago. In discussing relative strength readings for the NASDAQ, indexes in general, we pointed out that stocks can stay in overbought conditions for long periods when viewed on a monthly basis. However, we noticed it is disruptive for stocks when the indexes fall out of overbought conditions on longer timelines.
The NASDAQ crossed that unwanted threshold on Monday. It moved out of an overbought reading for the first time in more than a year. The last two times this happened, as you’ll see on the chart below, the NASDAQ struggled to head higher for at least a year.
Obviously, past performance is no guarantee of future anything. However, another less lawyerly saying applies as well. Those who ignore the past are destined to repeat it. We aren’t completely negative on stocks yet, but we are definitely going to adjust tactics and take a more defensive approach.
In the short-term, the NASDAQ is approaching an oversold reading. A bounce higher would not be surprising. Unlike previous rallies following a selloff, investors might consider selling short-term holdings and losers you’d like to unload to build cash positions during times of market strength. Whereas, before it was buy the dip on any sign of strength.
If the dreaded correction is almost here, cash in the bank will be king and afford investors the opportunity to own some of their favorite stocks at lower prices, perhaps much lower. Index investors might also consider adding an inverse index exchange-traded fund (ETF) like ProShares Short QQQ (PSQ) during rallies as a short-term hedge against a potential correction.
Not much managed to turn a profit in the last week. Banking, Energy, Oil and Gas were the only to top 1% and just eight of the 50 sectors/industries finished above water in the last week of trading. Needless to say, we cannot encourage anybody to take bullish positions based on our current outlook. We’ll continue to live by the adage, “It’s better to be out of the market wishing you were in than in wishing you were out.” We’ll stay on the sidelines until we feel comfortable going long or short.
Once again, it doesn’t make much sense to buy something new if we feel the odds are it will be cheaper in the days/weeks to come.