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This is the new world we live in. I wrote last week’s note to you on Thursday, it takes a day or two to go through our compliance department and is usually sent by Monday. By the time it was sent to you the pullback had happened to the extent of nearly 10% on the Nasdaq index.
I believe this is the new norm. We had unprecedented moves from late February to late March causing the quickest bear market in history. It would be easy to sit there and say that was an anomaly, but with the age of computer trading, algorithmic techniques and the current investor psyche, market shifts can be swift. This is the reason I started my Buy/Sell chart. I’m a visual learner, and now a visual teacher.
We’ll look at the Buy/Sell later, first though let’s look at the Nasdaq Chart. The blue line is the 50-day moving average, while the orange is the 200-day. Technicians look at these trend lines as levels of resistance, and since the Nasdaq dropped down and touched it on Tuesday, and has (at the time of writing), bounced off those levels, you can’t argue their logic.
If you look back to the end of February, you will also see there was a pause at both the 50-day and 200-day moving average, before ultimately falling through to the March lows.
The charts, I jokingly say, are 100% correct after the fact, not unlike the Monday morning football analyst. Rather than look at a chart for what we should have done, I try to use them to tell me something I don’t know. For instance, I find one of the best indicators for when a market is getting (or already) overheated, is to measure the distance between the index close and how far that price is from the 200-day moving average. The chart below I’ve showed you in the last couple of notes.
Moves like this are not uncommon in market rallies and in no way tell you that the run is over, however it is deserving of a deeper dive to the constituents. Some stocks in the index will be extremely overheated, while others may still have room to move higher.
Although it may not feel or look like it, I believe (at least from a market perspective) we are mostly past Covid. The current overhang is the election, and beyond that is earnings. Despite whom gets in the White House, I will argue that companies will still figure out a way to make money…it’s the American way! There are always opportunities out there, CEOs just want to know what the playing field looks like. Where uncertainty is abounded, it’s difficult to make longer term decisions. Once the election is behind us, we can turn our attention to earnings and where they should be. Till then we will be held hostage by the headlines.
Now for the past few weeks I’ve said holding some cash can be a prudent strategy. So, what now? We had a quick correction (at least in the Nasdaq index), so is it time to buy on the pull back? For suitable investors, I say yes. I started this note by telling you that it’s a new world, and yes you need to be nimble. If you’re a long-term investor, which many of you should be if you’re reading this, then 12-24 months from now I believe the market could be higher. So, adding a little bit back when you get a quick pullback is a sound strategy. If we get a further pullback to levels that are closer to the 200-day moving average, then that may be an opportunity to put additional cash back to work.
Tech took most of the hit in this recent pullback, however it also dragged down some of the “cyclical” sectors with it. If we are to be in a sustained longer-term bull run, we will need the “cyclicals” to contribute. Click here to read my note on cyclicals. Financials, Industrials, that have lagged since the market lows in March, I argue, still offer some good valuations.
Don’t write off all of tech, however. The chart below (Tech vs. S&P 500) in a relative strength chart, shows this recent pullback is still within a range.
We are looking for a stop to that uptrend before you we move from our tech overweight. So far, we are still within range. We will be paying close attention to this chart in the coming days/weeks.
So, let’s look at the buy/sell. Yes, I acknowledge that it is still above “sell line”, however you can argue that when rates are this low, multiples should be higher. I’m a cautious optimist at this point.
I have lots more to say on this subject, but that’ll have to wait for next week. Have a great week.
The displayed charts are for illustrative purposes only. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Mick Graham and not necessarily those of Raymond James. Prior to making any investment decision, you should consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Expressions of opinion are as of this date and are subject to change without notice.
The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results.