Nasdaq momentum slowing

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.

NASDAQ Momentum Slowing - NDX chart showing RSI, stochastics, MACD and Volume

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.

NASDAQ Momentum Slowing: Composite Seasonality Chart suggests seasonal correction may occur

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.

 

14 Comments

  • Hello. You mentioned the potential for a 10% correction however looking at your chart, I see a July drop from 6% down to 3%.

    Does that mean a 6-3=3% correction.

    Confused, can you explain this?

    Reply
    • What I’m referring to is the degree of corrective action that occurred the last time we had momentum and moneyflow divergence–which was late 2015. At that time the NAS fell from approx 5180 to approx . 4380. Thats about 15%. so I suggested that there is potential (not a prediction) for a 10% or greater correction – no predictions exactly how deep or even if it does occur–as noted, the view I have is a probability thing, not a predictive opinion.

      Reply
  • Hi Keith.
    I have similarly reduced/taken profits in my XQQ and XLK and would gladly buy back my shares at a lower price in case of a correction.
    Can you comment on Canadian technology stocks. Canadian technology has lagged. I have a small position in the XIT and want to add to it. How does it measure up seasonally/technically in your view?
    Thanks as always .
    Joe

    Reply
    • Technically the CDN tech sector – per XIT–is rough. I think there is less commonality/ less correlation between the stocks that make up the index, hence the underperformance. thus, it might be best to buy the favorites or best charts of the index rather than the index itself. for now, I am avoiding technology in general as I think there may be some tailwinds caused by a selloff (if there is one) on the US tech stocks. We shall see…..

      Reply
  • “The second item is something that Ed Seykota thought me. When a market makes a historic high, it is telling you something. No matter how may people tell you why the market shouldn’t be that high, or why nothing has changed, the mere fact that the price is at new high tells you something has changed.”

    Larry Hite (Market Wizards)

    “NYSE composite index ($NYA) had 19 years of consolidation (from 1997 to 2016) and finally a bullish breakout.”

    Cris Ciovacco (Capital Management)

    Food for thoughts?

    Reply
    • Hey JP–Its interesting you watch Cris’ work–I like his stuff- he is a moving average guy and that is a smart way of looking at things-although he tends to be purposely vague in his messages sometimes…
      The higher highs and lows spell out an uptrend. No doubt about it–despite my longer termed perspective that we are in the final “wave” of the current bull market before a larger correction occurs. In the nearterm, things are bullish, but… there hasn’t been a healthy 5-10% correction within the uptrend for a while. Its overdue. So one MUST occur soon to keep things healthy.

      Reply
  • Hi Keith- Two quick ones. First of all the USD has broken through the 79 cent barrier. Do you think it will hit 84 or is this almost over? Second- Don Vialoux has called for a correction due to the July 17 “seasonality top” in both Canada and the US. Do you agree that a correction in looming through September? 10%+?

    Reply
    • I wouldn’t be surprised if Don comes out correct in his prediction. The market is getty goofy in its relentlessness. Nothing can last forever–we need a correction to remain in a healthy uptrend….

      Reply
  • How does an investor differentiate between investing in a juicey little 5 – 10% pullback when the market might really be on its way to a devastating 50% pullback?

    Reply
    • Read my book Sideways Bruce–basically, it explains that you don’t predict when it will stop – you wait for a base then buy.

      Reply
  • I’d like your most current view of the Cdn/USD rate expectation. Your last update stated “My target for the loonie is for a revisit of the $0.78 – $0.79 area. I would give a very thin chance of it reaching the dominant downtrend line at $0.80.”
    We are just below the $0.80 threshold. Anything in the news which may make you increase your forecast. I wish to buy some USD so wondering whether to do it now or wait until the seasonal stronger period of Sept/Oct.
    Thanks for your thoughts.

    Reply
    • I think we are about as close to a peak as we may see for the loonie. Yes, it can overshoot $0.80 for a small period.
      Having said that–its been pretty surprising how fast it moved–watch for my blog Monday where I will address the USD–which affects the loonie

      Reply
  • Its very difficult to sell your tech stocks or any stock and then try and get back inthe after a pull back

    Reply
    • It has been. But we are now officially “up” on the trade for Google, given its pullback today (sold a week ago). Problem is that they are priced for perfection…

      Reply

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