Um, that’s not good. We aren’t talking about some bad tasting, new fad food. No, we are talking about the NASDAQ’s Monday move. The tech dominant index slid 350 points, chopping off 2.55% in the opening session of the week.
The blood red drop is significant for a couple of reasons. Last week, we wrote about the NASDAQ failing to break through to a new high with profit taking kicking in as the index challenged its previous high-water mark. We also mentioned the index would likely find support at 13,500 and attract some buying. That’s almost exactly what happened last week.
Unfortunately, Monday’s selloff wiped out last week’s rebound and more. Wall Street’s worries about inflation is the given reason as to why investors were in a sour mood. Inflation is real. Just look at your account online as see how much more you are paying for gas and food this year compared to last.
It’s a simple equation, costs are rising and for most, their income stays the same. That means you are left with less discretionary money to spend on whatever your want. That’s just one side of the equation. On the other side, input costs like supplies, labor, transportation… are going up for companies. At the same time, the consumer is being squeezed and has less extra money to spend. Companies have a tough choice, raise prices and possibly reduce demand, or watch their profits fall as higher input costs reduce bottom line output.
We haven’t even talked about taxes, which are expected to go higher as well, adding to input costs or reducing output; however, you want to account for it.
Wall Street is looking at earnings and most likely expects profitability to fall in the next six to 12 months. Stock prices will eventually reflect expectations as investors re-price assets to match market conditions, which brings us back to Monday’s NASDAQ selloff.
The million-dollar question: Is the market in the early process of re-pricing or just has some jitters? Unless the market reverses course right away, the odds heavily favor more downside. Monday’s price action broke the uptrend that started in early March. The last time an uptrend was broken was in late February and the NASDAQ fell from 13,600ish to 12,400ish in a hurry.
There isn’t much room for error with the NASDAQ closing at 13,401.86. If the NASDAQ closes below 13,400, then it’s likely headed to 13,000, then 12,800 and then to the 200-day moving average, which should be around 12,500 by the time the index gets that low.
Investors looking to protect against a correction might consider an exchange-traded fund (ETF) like ProShares Short QQQ (PSQ). The ETF’s objective is to return the opposite of the NASDAQ 100 on a daily basis. For example, on Monday, the NASDAQ dropped 2.55% and PSQ gained 2.72%. The difference being PSQ represents just the NASDAQ 100 and not the entire index.
Not surprisingly, inflation-sensitive sectors were at the top of our proprietary performance leaderboard. Energy, metals, mining, materials, financials… dominated. Despite their strong returns, we are reluctant to add anything new at this point. A sinking tide lowers all ships. Inflation-related sectors might not fall as much as say tech, but will fall nonetheless if the overall market takes a dive. Why buy something for a dollar today that might be worth 90 cents in a week or two or three?
Same goes here, why pay full price for something that is likely to go on sale? The market isn’t like a department store when you are refunded the difference if something goes on sale right after you buy it. With stocks you bought, you own it for better or worse.