The NASDAQ has the greatest risk for correction at this time. 

As noted last week on this blog, I suggested that probabilities were very high for a market correction. Seems to be that this potential is materializing, as noted by the weakness between Friday and today (Monday Feb 22). What is most interesting to note is the relative weakness of the NASDAQ vs the broader indices. I have been pounding the table for about 8 months now to migrate OUT of technology and INTO materials and value.

One of the reasons for this suggestion is the relative “overboughtness” of the NASDAQ vs. other less focused indices. Below is a chart of the S&P 500, as posted last week. Its high of early last week saw the index move to about 13% over its 200 day (40 week) Simple Moving Average (SMA). Its starting to correct.


Lets compare the S&P 500 to the NASDAQ. As you might notice on the chart below, the NAZ is currently trading some 17.5% over its 200 day SMA. Note that momentum studies (RSI, stochastics, MACD) are overbought, just like the SPX chart above. But the EXTENT of that overbought status is greater–as noted by the significantly higher RSI level over its overbought (top horizontal line) point. MACD is significantly higher as well. All things being equal, a retracement of the NAZ to its 200 day SMA would result in a 17% correction, vs. a 13% correction on the S&P 500. The NASDAQ index has the greatest risk for correction at this time.



Now lets look at the TSX.

I continue to press the issue that you want to focus on value and materials over the coming year. The TSX composite is significantly more weighted towards those areas – particularly materials, than is the S&P 500. I posted a breakdown of  the TSX composite vs the S&P 500 composite on this blog. If you go to that blog, you will note that the TSX is 25% weighted in materials and energy, vs. only about 10% within the S&P 500 index. For this reason, we began overweighting these TSX stocks in our ValueTrend Equity Platform some months ago. Its paid off in our performance – I rather look forward to posting our numbers for February next week!  But..I digress….

Note that the TSX 300 index (chart below) is showing a price that trades just under 10% ahead if its 200 days SMA. Sure, that puts it on the border of being overbought. But its not outright goofy like the NASDAQ – and its certainly less crazy than is the SPX. For those interested, go to that blog I note above with the index breakdowns and you will discover WHY the SPX is more overbought than the TSX. Hint: Its got a minor version of the NASDAQ’s problem.

Recall in last weeks blog, when I noted that the market was very likely to correct from its overbought status, that I noted I would NOT be selling ahead of this likely correction. Why? Because, as noted about 10,000 times over the past 8 months on this blog – the market is in a lopsided barbell situation. Stupidly overvalued stocks on one end, and a few stupidly undervalued stocks on the other. We have focused on the undervalued end of this barbell. If you have been reading this blog and following my suggestions, you are in a similar situation to us – you are outperforming with less risk. You are not “part of the problem”. You hold cheap stocks including materials and energy, and you bought them before the crowd jumped in. (hopefully) have now begun to gingerly step into other value sectors like staples- which I discussed on this blog recently.

If you, your friends and family are not taking advantage of this shift in the markets, do yourself (or anyone who may not be well positioned) a favor. Contact us. We’ll explain how we can manage your money as prudently and conservatively as we do ValueTrend clients. We are happy to have a quick correspondence via email if you wish to enquire about our services. If you wish to carry that further, we will set up a zoom or phone conference with you to go into more detail on how we might help you with managing your money.

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  • I hold a 10% ZQQ weighting in my portfolio.

    Never nice to see some of those gains erased but would you recommend I buy the dip? (No formal advise of course)

    The reason I ask is due to recent excitement regarding inflation – not a friend to growth companies.

    Yields still remain very low.

    Another quick one if I may:

    What’s the mechanism that’s allowing the 10 year treasury yield to rise?

    Always appreciated!!

    • Hi Lance–as you can see on the blog–the NAZ has the most to fall. Long term investors can grin and bear a 10-20% pullback. But I have no interest in participating. It will eventually be a “buy the dip” situation, but I think that will be much closer to the 200 day SMA.

  • Good call on energy!
    But XEG seems a little bit overbought short term, putting the TSX at risk; I took some profit today (not all), hoping to reload at better price. We will see.

    • sure–it can be traded and yes its overbought-certainly a great candidate for an out then re-buy as you suggest-but the potential looking out to 2021 is big in my opinion. Its been a very overlooked sector for too long.

  • Thanks so much for this analysis. When I look back over QQQ’s history, I don’t see many particularly deep drawdowns in the past 5 years or so (due no doubt to the strength of the growth style and technology in these years). Even during the COVID crash, the Nasdaq fell less than the S&P 500. Why you think that this time will be different than recent corrections where the Nasdaq has fallen less than the S&P 500? It certainly makes sense that the QQQ needs a washout given its outperformance, but it’s stubbornly refused to be washed out for quite some time LOL! Merci!

    • Paula–good question. keep in mind that I am bullish on the longer termed trend. But three factors suggest the NAZ has more downside in a correction (not a crash!) than more diversified indices. First- per the blog–its “more” overbought on a relative basis to other indices. Next- valuations–too many overpriced stocks–like 50-100x P{E ratios, etc. Finally- sentiment optix ( showed excessive optimism between mid January and early February–too much investor confidence and exuberance. That typically suggests a pullback much like other overbought indicators. All three of these factors point to a correction. How deep the correction comes from how far overbought something is. NAZ is more overbought than other indices – thus, greater potential correction. Note that buy and hold is NOT a bad strategy if you don’t mind a 10% or so pullback. Its still a bull trend.

  • I had a glance at the Schiller p/e today 35.63. With the max being 44.19 (year 2000) and the mean being 16.78 looks like we are entering irrational exuberance on the covid recovery and government stimulus.

    • Yes, historically a move to 25 by the CAPE (Shiller PE) has been “expensive”–we had a few spikes above that level in 1929 and 2000- both which were periods of speculative excess leading into massive crashes.
      I wonder if the low rates of today might alter the range of traditional valuation metrics like the CAPE. 100 years of data shows that long and short rates spent most of the time in the 3-4% area, with extremes above those levels during times of inflation. Last July we saw a drop below 1% for the first time in history in the 10-year t-bond. So….my theory (for the entire 2 cents its worth) is that the market will remain overvalued and uptrending UNTIL rates signal a genuine reversal in trend. Mind you – “the market” right now is the tech stocks, growth stocks, etc. These are interest rate sensitive (growth slows when rates rise) – but ironically, commodities rise during such times….so…”the market” MAY crash in 1,2,3 years (who knows) when rates rise–but its likely that the downside will be felt more by the growth stock side of the barbell per my blogs over the past 8 months.

  • Hi Keith,

    I wonder if part of the reason it looks so overbought relative to the 200 day ma is because the 200 day ma still includes some data points of prices at pretty extreme low levels in March/April 2020. If the market didn’t drop so much from the trend temporarily, the 200 day ma today wouldn’t be impacted to the degree it has by those outliers. Once we get to April 2021, those March/April 2020 outliers will be out of the 200 day ma calculation which will cause the 200 day ma to increase (granted it won’t rise dramatically) and not make the market look as overbought today. I guess I’m wondering if the 200 day ma is a little bit deceiving now since it includes outliers that aren’t as relevant in a way anymore?



    • Good question Josh–
      The 200 day is the “standard” because it does contain so much data. The data from a year ago when prices were near the crash-low are just a small part of the entire 200 days of data–thus, the significance of the indicator continues to be very relevant.
      Very different if we were examining the 50 day SMA in, say, May of 2020. Then, yes, it would be skewed more significantly.
      Good point though, thanks for bringing it up.


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