Sometimes the market zigs when you thought it might zag. That’s the uncertainty of investing. It’s also why it is important to have a defined strategy as you navigate choppy waters, like we are in now.
Last week, our market models were tilting toward higher prices, writing, “Investors are in a good position now because we have reasons to believe prices are likely to move higher but, if it’s a head-fake, we know our downside targets.”
Our targets were laid out the following game plan:
The NASDAQ could run into selling once it hits it 200-day moving average. If, like The Doors, traders can break on through and close on the other side of 14,733, it might trigger a wave of algorithmic buying that could push the index as much as 500 points higher.
On the downside, if the 200-day benchmark is too tough a barrier to crack, then the NASDAQ should catch support in the neighborhood of 14,250. Traders that play it tight might consider cutting losses if the NASDAQ closed below the first line of support. More patient types might hold in there until the NASDAQ closes below its 50-day moving average of 13,769.
The NASDAQ went straight selling afterward, caught weak support around 14k, promptly headed down to the 50-day moving average, and collapsed below the key benchmark to start this week. As quickly as Thanos snapped his fingers, the NASDAQ switched from strength to weakness.
Sellers taking charge is not surprising when you consider that one of the nation’s leading financial firms has a dark outlook for the US economy. Bank of America strategist Michael Hartnett warned clients like this, “’Inflation shock’ worsening, ‘rates shock’ just beginning, ‘recession shock’ coming.” (1) Maybe Hartnett is a reader of this newsletter as we warned of an impending recession about a month ago.
Most market watchers believe the financial markets are leading indicators and forecast about six-to-nine months in advance. Since the market began its decline at the start of 2022, rumors of recession could turn into reality anytime from now to September.
The depth and ugliness of the market’s swoon should give us an idea of how deep and ugly a recession might be. As of right now, the market is forecasting a relatively tame downturn that might last three to six months before heading higher.
However, with stocks going sour last week and breaking through the 50-day average, the recent low of 12,500 becomes a potential gamechanger. If 12.5k doesn’t hold, then the NASDAQ’s 200-week moving average is a potential landing point. To give you an idea how significant hitting the 200-day mark is, COVID was the last time the NASDAQ visited the neighborhood.
Right now, investors might think about using market strength to sell underperformers and then reallocating cash towards market leaders. If support at 12,500 holds firm, it could prove to be a good place to buy the dip. If not, then stocks, and the economy, could be headed for rough times.
Defensive sectors moved to the forefront of our leaderboard. Healthcare, Energy, Consumer Staples, and Utilities were amongst the top performers as consumers’ demand for those items remains during economic turmoil. So, not only is Bank of America worried about a recession, but Wall Street is also investing as if a recession is on the horizon.
We can add anything under the current conditions.
1 – https://www.reuters.com/world/us/global-markets-flows-urgent-2022-04-08/