The NASDAQ still has muchas’ risk, Amigo’s!

I think the NASDAQ has more downside to go, proportionate to the more diversified indices. Take a look at the past two years. Despite this years “AI exuberance”, the index is still down some 2000 points (about 13%) below its late 2021 highs. That’d be yer’ basic negative 7.4% annualized rate of return over the past 20 months!  ¡ay, caramba!  Compare that to the SPX, which is influenced by AI to a lesser degree, now down about 6% since its 2021 high. Meanwhile, the DJIA, which has a tech weighting similar to the SPX with much less focus on the AI stocks, is only about 3% off of its 2021 high.

So – does that mean the NAZ is a bargain? Or is it likely to continue being a more risky market bet of the bulls? Todays blog spells out some of my technical thoughts behind my lack of faith in the NAZ, at least for the near-term.

Below is a chart of the NASDAQ.

After the consolidation between October of 2022 and this spring, the NAZ broke out. Normally, a neckline breakout after a bear market – like we had on the NAZ this spring when it blew through 13,000 – is bullish. And it still is, by most of my metrics. But there are a few warning signs that are not being seen in the more diversified indices. For example, note the index reached about 16% over its 40 week (200 day) SMA. You may have taken my Online TA course. I talk about markets that are more than 10% above their 200 days MA. If other indictors flash bearish at the same time, you often see a correction.

Back in July, the NAZ was overbought. Two indicators that help us spot an overbought market:

• Markets are overbought market too much greater than 10% above the 200 day SMA. In July, the NAZ hit 16% over the moving average
• The MFI indicator is coming off of a sell signal during the June/July period.

Look back to 2019 – 2022.  Note what happened every time this combination occurred. That is, a % above the SMA of 10%+, and an MFI sell signal. It was never pretty.

What’s wrong with this picture?

Love this quote

“Economists who adhere to rational-expectations models of the world will never admit it, but a lot of what happens in markets is driven by pure stupidity – or, rather, inattention, misinformation about fundamentals, and an exaggerated focus on currently circulating stories.” — Robert J. Shiller

Final thoughts

I noted in my last blog that I maintain a target for the SPX to hit around 4200 – 4300, give or take. A reasonable target for the NAZ might lie between the 40 week/ 200 day SMA in the low 12,000’s and the March 2022 spike near 13,000. As I mentioned in the last blog, the stage is set for the current rally to end in the next week or so. Seasonally, markets often rally surrounding the Labor day holiday period – which is right now. I believe that if we are going to hit my potential targets, it could happen in the back half of September. Per my quote from EquityClock: “The weakest time of the year for the market is directly ahead, during the back half of September.”

ValueTrend has maintained over 20% cash weighting in our Managed Platforms. We’ve limited our entire equity focus on commodity and value plays. Opportunity in the broader markets is approaching. But in my opinion, it isn’t here yet.

Muy peligroso, Amigo’s! Beware of more risk ahead.