Last week’s stock market action reminded me of a sunny, spring day in the 1980s. My friends and I skipped school to go to the river on an unusually warm, early April day, high 80s-low 90s.
Red Rock is what the locals called it. A place where the river bent between a small beach on one side and cliffs on the other. In addition to cliff diving, a bridge for freight trains allowed us to swing from a tied rope and do backflips off the bridge’s top rail.
You don’t think straight in your teens.
While the air was hot, the running water of an early spring river was not. I walked around to the cliff side after throwing my Ocean Pacific T-shirt on the beach. Thirty feet above the river on the cliff’s edge and jumped in like a Coors’ commercial.
It felt like jumping into a pool of ice. I swear, the moment my toes submerged, I paddled like hell to get back to the surface. I flapped so fast I am unsure if my head got wet.
That’s sort of what the NASDAQ did last week. We expected the index to backflip off the top rail of its RSI range, and it did. If only like a teenager realizing the April river water is freezing cold. An intraday range of more than 200 points on Thursday, only to rebound on Friday and some more on Monday. I am unsure if the index fully went under water in its fall.
The quick rebound put the NASDAQ back on the RSI cliff with another reading above 70 (a score of 70 or more is generally considered overbought). It didn’t plunge into the running waters again for another month or so. Unfortunately for investors, it probably won’t be long before Wall Street pushes the index off the edge once again. Hopefully, this time the drop is a little slower and longer lasting. It can drop 200 points again, but it would be healthier if it took a week or two instead of a few hours.
Although momentum is pointing higher, RSI readings above 70 don’t last very long for broad indexes, like the NASDAQ. It might take a day or week or two, but another fall is coming. It’s a similar path the index took the last time it went into overbought territory. A quick burst of selling, followed by a rally before the index rolled over and shaved off about 1800 points.
Of course, nothing repeats perfectly. It would be great if it did.
As we mentioned a few sentences ago, we don’t know when the red RSI wave begins, but we do believe the risk to the downside outweighs the upside reward at the moment. In our opinion, the best course of action is to hold tight for now. X marks the spot we don’t want to cross below is 14,400. After that, the NASDAQ should have a ton of support between 14,200 and 14,000.
For now, investors might consider selling short-term positions into strength, building some cash for the inevitable dip.
It’s not surprising to see technology and energy at the of our sector performance board again. The duo has been leading the market higher during the recent run. We expect both to maintain their roles; however, with the NASDAQ in an overbought condition, we feel it best to wait for the selloff before adding new money to either.
Our investment theme remains the same here, wait for prices to drop and add your favorite tech and energy names at a better price, hopefully.