The markets sent out mixed signals on Monday as the NASDAQ slid while the DOW and S&P 500 managed to put modest gains on the board. However, as regular readers know, we focus on the NASDAQ’s action as the key barometer. Frankly, the tech heavy index’s recent price movements are a bit troubling.
Wall Street did not take the NASDAQ through its recent highs with any conviction, a blip and then a drop. The more times a price level pushes buyers into retreat mode, the more difficult it becomes to smash on through to the other side. It’s called resistance in investing lingo. The more often prices fall in the neighborhood of resistance, the more often computer programs will switch to sell if the line isn’t broken.
A bearish moving-average yellow flag is another concern. When short-term moving averages fall below longer-term numbers, it can be a warning signal that the mood is about to change. The signal we are talking about is Moving Averages Convergence Divergence, MACD for short.
The last few days of price action for the NASDAQ have moved the short-term moving MACD below the longer term MACD number, which can be a negative. It’s not foolproof, but if it doesn’t correct right away, the market/stock/ETF tends to move in the direction of the cross. Down in this case.
The last time something similar happened was in February, when the NASDAQ fell from 14,000ish to 12,500. We don’t expect to see a comparable drop if selling continues. The index could make its way to the 50-day moving average around 13,500, where it should run into a couple of the backstops:
- The 50-day line
- Past resistance turned support
- The bottom edge of the current, upward trendline
If all three of those support levels were broken, then we could have some problems.
Prices should continue to catch support from earnings announcements. Quarter to date, nearly 60% of the S&P 500 companies have reported their results. Two-hundred-and-forty-nine of the 297 that have released their financial report cards topped Wall Street’s earnings expectations. If the rate continues for the remaining 200 companies or so, the 83.84% bullish surprise rate would be the second highest since 2002. (1) Moreover, 78% exceeded Wall Street’s revenue targets as well.
On the negative side, valuations as measured by price to earnings (P/E) are elevated and significantly higher than the five and 10-year averages. Although, with all the money being pumped into the system from the Federal Reserve and Federal Government, it’s not surprising. All that money, like water, has to go somewhere.
Investors might take a cautious approach in the next couple of days to see if the NASDAQ’s recent dip turns into something a little more serious.
Defensive sectors took control last week with energy exchange-traded funds (ETFs), financials, and consumer staples charging their way to the top of our leaderboard. It also shows the NASDAQ noticeably underperforming the S&P 500, which is another caution flag to keep an eye on. In the current state of mounting potential warnings, we won’t consider adding any additional sector exposure until the NASDAQ is on more sound footing.
Again, we’ll refrain from considering any equity additions until Wall Street pulls the NASDAQ from its slumber.
1 – https://insight.factset.com/second-highest-increase-in-sp-500-eps-estimates-for-q2-2021-since-2002