Keep an eye on the NASDAQ, and the big tech’s / Biotech stocks that influence it.
Yes, the index is trending up. Moneyflow is positive—see the bottom pane of the chart below. That means that money is still entering the major components that comprise the index (for example, the FANG’s). This is positive for long termed investors. But there are signs of slowing momentum. And that could spell danger for in the near-term for these stocks.
Take note of the negatively diverging stochastics, RSI and MACD indicators on the chart below. Moneyflow momentum (top pane) and volume are slowing as well. These things tell us that enthusiasm might be waning a bit on these high flying stocks.
Take a look at late 2015 on the chart above. These same momentum indicators were negatively diverging after the NASDAQ completed a new high, and began consolidating. What followed was a healthy, but significant, correction.
Does this chart suggest with any certainty that a correction will occur on the NASDAQ?
No – it is just a probability, not an absolute. The NAS can keep going up.
But…there is a better than average chance of a correction happening on that index in the near-term. If you take seasonal trends into account, the case for a correction gets stronger. Here’s the equityclock.com seasonal chart for the NAS – note the peaks and subsequent declines in July and September.
Long termed investors probably don’t need to be too concerned here, but for those who think in shorter termed horizons, there is a potential for a 10% correction or so—similar to that of late 2015. We reduced our tech holdings again the other day. We now only hold about 4% US technology in our equity platform. We’d be happy to buy back in on a correction. I can’t say for sure that this was the right move, given the bigger trend picture. But there is enough evidence for a potential correction to make us want to reduce our portfolio risk at this time.