Last week we wrote about distressed market signals in the form of an upside-down V pattern. Stocks started the week deep on the red side of the tape before rebounding mid-session. The NASDAQ’s intraday low of 12,722.59 didn’t totally complete the right side of the bearish V pattern, but close enough as nothing is exact when it comes to chart watching.
Our momentum measuring sticks reversed course across the board thanks to Monday’s rebound. Now, the overall score is far from a buy reading, but does indicate we could be in for more upside in the immediate term.
Does that mean the worst is over? Probably not.
As we saw in previous rallies, strength tends to be muted as it approaches overhead resistance. There are a couple of places where bulls can bump their heads on the way up. The first point of contention should come where the tech-heavy index stumbled last week at 13,300ish. If buyers continue on, then sellers will likely test bulls‘ resolve once again in the neighborhood of 13,700. And then again in roughly 250-300 point increments all the way to 14,600ish.
As you can see on the chart below, there are plenty of spots for a NASDAQ rally to stall as prices move higher. The same can’t be said on the downside. If the NASDAQ closes below 12,555.35 and goes beyond finishing the right side of the inverted V, it likely triggers another wave of selling that could take off 500-1,000 points in a hurry.
Based upon our view that upside is likely to be choppy, restricted, and full of technical pitfalls, investors might consider using any continued strength as an opportunity to lock in short-term profits and raise cash by selling underperformers.
To be clear, underperformer doesn’t solely mean unprofitable positions. Plenty of recent acquisitions are underwater. An underperformer is a holding that’s down more than the overall market or peer group, depending on your measuring stick.
For example, if you own a technology stock that’s down 10% but the NASDAQ is down 15%, your tech stock has actually outperformed the index. On the other hand, if your tech holding is down 20% while the NASDAQ is down 15%, that’s an underperformer.
Like Popeye saving Olive Oyl from drowning, investors should aim to be out with the bad and in with the good.
Not many sectors did well in the last week with only a handful managing to generate plus returns, with Homebuilders and Real Estate being two of the five. It’s sort of surprising to see Real Estate holding up as interest rates have risen dramatically while inflation is jacking up home prices, making housing out of reach for a growing number of would-be buyers.
There is too much downside risk to upside reward under current market conditions to consider adding anything new here.