Well, that’s not good.
For the past two weeks, we’ve talked about the NASDAQ being in overbought territory according to its Relative Strength score. Our expectations were for the indexes to fall because of elevated, short-term prices.
Boom, the NASDAQ has retreated five days in a row, getting monkey-hammered to start this week’s trading, down more than 1%. Wall Street algorithms hit the sell button because of surging COVID-19 cases due to the Delta variant.
However, JP Morgan’s Marko Kolanovic and Goldman Sachs point out yes, Delta cases are spiking, but the strain is far less lethal than last year’s COVID-19. Hospitalizations and death rates are significantly lower than what the world experienced just a year ago. (1)
It is possible that both Kolanovic and Goldman Sachs are wrong, and that hospitalizations and death rates will move in line with cases. If so, we’ve been down this road before and have a sense of what to expect, whereas we we’re flying blind in 2020.
The NASDAQ could shave off some more in the days ahead, but the index should find firm footing at 14,200. The level was a hard top for the first half of 2021 and could be equally difficult to break past on the downside. However, there is a big but inserted here. There is some wiggle room below 14,200. If the tech heavy index closes below 14,100, we could be in for some real danger.
Although our belief is stocks will bounce back in the coming days, memories of 1000 point drops, day after day are still way too fresh to forget. We want to see the rebound before taking any bullish “buy the dip” action. That way, we know where the pivot point is to set our downside limit; just in case we replay in part, or in whole, last year’s waterfall selloff.
Wall Street took a more defensive approach in the last week as only Utilities and Consumer Staples managed to stay above water. Again, we are tempted to attack leading sectors that took a hit last week like Tech, Healthcare, and Energy… as they should be the fastest to recover if the Delta scare is short-lived. Yeah, but it’s not worth the risk of having a few more days like Monday. Waiting for a reversal higher is the safer way to go. At least then we know where to cut losses should the Delta correction mirror last year’s COVID trading.
The lure of quick profits is a strong draw considering we expect the market to bid higher soon, but we want to see it go green first. We’ll wait.
1 – https://www.zerohedge.com/markets/jpms-kolanovic-stop-freaking-out-about-delta-case-spike