Bulls won a tug of war with bears to start the week. The NASDAQ was up early in the session before falling to make a new 52-week, intraday low and closed well into the green by day’s end. Investors might need one of those whiplash neck braces if this sort of trading keeps up.
While it is encouraging that buyers were able to battle back and overtake sellers, the market is nowhere close to out of the woods yet. Monday’s rally closed near a key technical point; 12,500 completed the upside down “V” pattern we’ve been talking about for the past few weeks. The NASDAQ went beyond finishing the right side on the “V”, putting the index in danger of accelerating lower.
It is a relief that the market did not go blood red after last Friday’s technical breakdown. However, many times, past support becomes current resistance. And there are plenty of previous support levels overhead that will cause any rally to sputter and stop.
These are sure to be confusing times. Goldman Sachs believes the market should rally thanks to stock buybacks. The Citadel’s Ken Griffin says inflation could become uncontrollable. Ray Dalio feels we are out of the bubble zone, but the market is still not safe. Bank of America (BoA) analyst Michael Hartnett believes things could turn grizzly. The overall sentiment is bearish to outright scared with Goldman as the outlier.
From our vantage point, the risk is to the downside. However, there is some hope for bulls. The key is what happens if/when the NASDAQ gets to 13,000, which is another support turned resistance level. If buyers can close the index above 13k, then it has a decent shot to make it to its 52-week moving average of 13,492 and falling. Unless there is some unforeseen shift in sentiment, the 52-week benchmark would likely trigger some profit taking.
That’s the best-case scenario for the immediate future, not overwhelmingly exciting, we know. But it would also set Monday’s intraday low of 12,202 as a point of support. Monday’s low is another key number. If the NASDAQ doesn’t rally past 13,000 and subsequently closes below 12,200, then BoA’s Hartnett’s grizzly prediction breathes life.
For now, we’ll continue to use the trend as our guide rail and the trend has been to sell underperforming holdings into market strength. Once the knife has stopped falling, investors can reallocate cash holding into market leaders. Of course, we’ll let you know if/when market conditions shift towards the bullish column.
Only two sectors managed to stay above water in the last week and they were Energy and Oil and Gas funds. Everything else was in the red. As much as we like shopping on the cheap, the risk is that most things could get cheaper. We’ll practice patience and wait until we can identify our downside risk more clearly.
There is just no way we’d jump into new stock positions right now. Instead, investors might think about building a list of industry/sector leaders to add when conditions improve.