What goes up must come down, right? It’s Sir Isaac Newton’s Law. But it wasn’t really about gravity or apples or any of those things. Rather, it was part of his for everything there is an equal and opposite reaction theory.
Newton, obviously, never heard of Wall Street during a tidal wave of stimulus spending and zero interest rates.
He was wrong on two accounts:
1 – What goes up on Wall Street continues to go up during times of unprecedented spending.
2 – There is only one reaction, buy, buy, buy, and when there is some selling, it may be the opposite of buying, but it’s nowhere near equal in terms of price, for now anyway.
We might be on the verge of number two, some selling as the NASDAQ is in overbought territory on a daily, weekly, and monthly basis. No matter which chart you look at, the index is redlining its normal Relative Strength (RSI) readings.
The monthly score has been extended for a while, which is not unusual, but when it breaks, it tends to be disruptive to the downside.
Meanwhile, weekly and daily readings are less tolerant of numbers above 70 (the general rule of thumb for the initial level of overbought). Usually when either gets a little too high up the mountain, sellers show up and stocks take a hit.
More than likely, any dip will prove rule 1 and 2 of our revised Newton’s Law to be true. Stocks will go down a little, 15,000 looks like a possible destiny as traders like round numbers, and then buyers will roar into action and push past the previous high. At least that’s been the pattern since 2020’s COVID bottom.
In the near term, it might be wise for investors to hold off on adding any new money to the market. Like C, D, and E follow A and B in the alphabet, overbought conditions tend to be followed by profit taking before too long.
As you might expect, technology did well with the NASDAQ dancing around highs. Innovative Tech, Software, and Cloud Computing made themselves at home in last week’s top performers. Tech had plenty of company with an interesting mix of unrelated industries: Real Estate, Marijuana, Oil and Gas, and a few healthcare related exchange-traded funds (ETFs).
With the stocks perched for some potential profit taking, it probably makes sense to wait for at least the daily overbought reading to disappear before jumping into any ETF under the current technical circumstances.
Long ago, we learned one must trade their convictions. As you know from the opening paragraphs, we expect the market to lighten a little. In that case, we’d rather sit patiently and see if we can pick up some stocks we might like at a better price. Why pay full price today if we can get a discount tomorrow?