Apparently, the fall of US-backed Afghanistan government is no big deal on Wall Street. Stocks opened down on the news of the Taliban taking over the country and then rallied. The Dow and S&P 500 finished the day on the plus side. Meanwhile, the NASDAQ recovered all but 29 points after being down more than 200.
Normally, it’s wise to follow the market’s lead. However, it’s hard to imagine the events that unfolded during the weekend will be consequence free. Nonetheless, until the ripple effects manifest, investors must make decisions based on current market conditions versus hypotheticals.
As it stands now, the NASDAQ is resting on its current rising trendline. The index has been consolidating for the last month, trading in a tight range. The top of the box is roughly 14,900 and 14,600 on the bottom. The key to the next move will be which side of the box is broken first. It will be bullish if Wall Street pops out of the box and bearish if the bottom falls out.
Afghanistan wasn’t the only geo-political news impacting Americans. OPEC turned down the Biden administration’s request to pump more oil. The news didn’t do much for Oil as it rose just 0.27%. Minus an economic slowdown, higher oil prices are likely to remain.
Finally, lost in the headlines, an infrastructure deal for more than $1 trillion is likely headed for approval. The road and bridges plan might get derailed by some who want to expand the spending by a few trillion more but will likely be law before long. It’s the potential for infrastructure spending that probably buoyed stocks in the face of images of mayhem coming out of Afghanistan.
Overall, we feel caution is the appropriate response with swiftly moving events. We’ll wait for things to unfold and to see which side of the box Wall Street picks in the next couple of days. Index investors might consider Invesco QQQ Trust (QQQ) if the NASDAQ goes green or ProShares Short QQQ (PSQ) if it goes red.
Defensive sectors, not military but those that tend to perform better in soft economic times, were at the top of the weekly performance list. Interestingly, it’s not the first time we’ve seen this rotation in the last month. Metals and Mining, Food and Beverage, Transportation, Materials and Homebuilders, Utilities, Consumer Staples, Industrials, Banks, and Financials made up the top 10.
With the defensive stocks moving into a leadership role a few times of late, it could be a sign Wall Street is in the midst of sector rotation. Based on the sectors of choice, the street might be hinting at a forthcoming economic slowdown.
Once again, we’ll play it safe with the NASDAQ closer to breaking down than breaking out. We’ll wait for the consolidation to end and then focus on companies taking on the most money.