As early as late June of 2020 and well into the fall of that year, I have been POUNDING the table on some key stock market patterns that I felt would come to fruition. These points were presented well ahead of the crowd as contrarian trades at the time. They turned out to be accurate. They were:
- The NASDAQ was (and remains) the most vulnerable to a strong correction due to its high components in tech, growth, clean energy and other overvalued over bought sectors
- The S&P 500, which holds an overweight component of some of the NASDAQ sectors and holdings, is somewhat vulnerable to a correction but not nearly so much as the NASDAQ
- The TSX, which has little exposure to those sectors, and holds the sectors where I saw (and see) the greatest upsides, is much less vulnerable
- Some, but not all, of the emerging markets and international markets will outperform the USA. Search my blogs under international investing, and you will find references to commodity producing nations like Chile, Brazil, Australia, Canada. You will also see arguments for outperformance by Japan and the UK.
- Value would outperform growth
- Reflation stocks would outperform (commodities)
- Reopening stocks would outperform
Recently- I updated my outlook. So far, these new ideas seem to be doing well:
- A new rotation into real estate, utilities, pipelines, consumer staples.
- I suggested that commodities would do well, but may consolidate a bit. I noted I was reducing (not eliminating) the positions after large profits and buying new positions in these new rotations.
- I suggested that the market is certainly setting up for a bubble in the longer term, but the neartermed outlook is for a flat or corrective market… not a crash!
- I continued to suggest the NASDAQ as the most vulnerable place to be.
Here is a chart of the NASDAQ. Warning….potential topping formation: It has NOT completed the formation! The potential is there for a double top. BUT…its only a double top if the neckline breaks. That’s just under 13,000. If the NASDAQ breaks its neckline, watch out! You would likely see somewhere in the mid-high 11,000’s as a corrective move. But if it doesn’t break, the recent pullback is just a pause- part of a sideways consolidation that’s been in place since the beginning of the year. We shall see
My prognosis remains – we will likely see a continuation of the movement into lower beta sectors like consumer staples, utilities, REIT’s, and other dividend focused stocks. See this blog for more on why you should own dividend stocks right now.
Although we’ve seen a couple of days of pullback recently, it wouldn’t surprise me to see a bit more. I’m thinking that the SPX will test 4000, or perhaps lower – but we are not talking a massive breakdown. The index remains extended too far above its 200 day SMA to be sustainable. But Biden is stimulating, and the Fed is cooperating. A big correction, or crash, will likely only happen if those factors are removed too quickly, as discussed on my last blog.
As for the NASDAQ – well, if there is an index that could see a meltdown (as I have been saying all along!)- this is the one. It was quite overvalued, overbought, and is still very sensitive to interest rates for reasons explained in prior blogs. So keep an eye on the 13,000 area – if it breaks by too much, things will happen fast. And watch the Fed for tapering and a more hawkish view – that’s poison for the NAZ. Keep an eye on inflation, which can influence those Fed decisions. Those are the factors that will be the demise of the NASDAQ.
Don’t worry, be happy!
We know the risks, we know the trend, I’ve presented you with some of the signs to watch for. As Technical traders, we have a system to get us out. So, why worry?
Until then, as I mentioned in my last blog…you can’t predict. You can prepare. You know what to watch for.
Your comment “As for the NASDAQ – well, if there is an index that could see a meltdown (as I have been saying all along!)- this is the one. It was quite overvalued, overbought, and is still very sensitive to interest rates for reasons explained in prior blogs.” I can’t quite remember you said in your blog on this aspect of the NASDAQ to increase in interest rates but I know it was negative. Do you mind clarifying this aspect again for us.
Hi-ho Silver! Happy to clarify-good question. The short version: NAZ is weighted in technology, Biotech, green energy, EV’s, and other high-growth sectors and stocks. High growth stocks are often very leveraged (debt). Cheap debt is good for them–they continue borrowing, continue growing with the investment of that borrowed money. Then, along comes inflation, which in turn can create a reversal in monetary policy by the FED. Not so cheap to borrow any more for these growth companies AND they start to face the higher costs of their existing pile of debt – this spells less profit, less borrowing for growth (or higher costs to do so) and the market starts to eye the reality of their future growth with a bit of fear…this can cause a potential selloff.
Hope that helps
Thanks for your clarification Keith. You have a knack for conveying complex ideas into easy to understand language. Keep up your great work.
Biotech like the etf IBB are consolidating in a trading range and the strong seasonal period is starting next month.
This look for a good play with support around $145.
BTW I am an Hichimoku user.
Thanks for your good work!
Hichimoku charting is very interesting.
I agree that IBB looks like a potential setup- nice pullback with no break of prior support at 145, near 200 sma–I have been considering it as well (don’t own it yet) for our aggressive platform.
ABOUT $USD: IF WE HAVE ANOTHER WEEKLY CLOSE UNDER 90.50, CAN WE TEST THE JANUARY SUPPORT AT $89.165 ? (NEXT SUPPORT AT $89.68).
GOOD FOR CANADIAN DOLLAR ($CDW), INDEED.
Strong support lies at 0.90 but it certainly could test the next low at around 89.25. Note that the C$ has seasonal strength slow down in the summer…