I’ve noted in these blogs over the past year that the day of reckoning would come for the high growth stocks and the NASDAQ. In fact, in this March 2021 blog I pounded the table suggesting the NASDAQ would underperform. I was right. Below is the NASDAQ chart, which illustrates a 19% pullback of late. More pertinent to my blog of last year, note that the NASDAQ is right back to the March 2021 levels! See my arrow on the chart. Investors holding a NASDAQ index have made zero net gains in the last year. Can’t say I didn’t warn ya.
Meanwhile, the S&P 500 and the TSX are at much higher levels. In my blog, I recommended readers focus on commodities and value stocks. Below is the IEV value index I mentioned in the blog. Unlike the NASDAQ, or the SPX for that matter, the value stock index remains above its 200 day SMA. And of course, its well above the levels noted in my March 2021 blog.
Here’s the CRB index. I’d say its a wee bit ahead of the March 2021 recommended levels.
OK, so lets assume you heeded my warnings about the NASDAQ and reduced your exposure to tech stocks and NASDAQ stock index weightings early last year. You wisely heeded my suggestions to buy value stocks and commodity producers at the same time. Awesome job – you are richer for it!
But now, you are possibly wondering if the NASDAQ is a buying opportunity, given the near 20% crash. You are worried that the commodities (in particular) are overbought. They may be ready to correct. For example – I got a question/comment on Mondays blog regarding a potential correction for oil.
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Anyhow–I will answer the NASDAQ opportunity question first. If you look at the NASDAQ chart above, you will see that it has violated my two primary sell rules. That is, it broke below the 200 day (40 week) SMA. That, and it broke below its October 2021 low of about 14,500. True, the index is now about 10% below its 40 week SMA. This implies an oversold rally. But the index needs to break well above its October lows AND stay above the 40 week SMA before I can endorse it. I will continue to largely (not entirely) avoid the index for our Equity Platform, except in the case of our Aggressive Platform which trades more rapidly (and can take advantage of short moves such as an oversold rebound).
Next question: Are commodities overbought, and should they or the producers be reduced?
Lets take a more detailed look at the two main commodity producer groups – metals and energy – and the charts of their ETF’s.
Below is the XME (SPDR metals and mining ETF) chart. Note the nice breakout after a rectangular consolidation. RSI and stochastics are not overbought on the weekly chart. Its above the 40 week SMA. And MACD looks to be breaking its downtrend. Momentum is building, yet not overbought. Do as you wish – but I will tell you that there are no reasons I can see here to sell the sector. We own several stocks and one ETF (not XME) in the sector, with no plans to sell.
Conclusion: metals are not overbought. And they are just now breaking out bullishly. ‘Nuff said.
The chart below is that of energy. It just broke its 2018 high resistance point. That, like the metals chart above, is bullish.
Energy, on the other hand, is (I am happy to report, given my strong stance on oil over the past 2 years) quite overbought. The XLE chart (SPDR Energy ETF) below shows us that the index is about 14% ahead of its 40 weeks SMA. I consider 10% + as overbought. Just like I noted with the NASDAQ being 10% below its moving average as oversold. MACD is trending higher and not hooking. That’s good. But Stochastics and RSI are overbought.
My conclusion is that the breakout through resistance and strongly trending MACD suggest long termed upside to come for energy. BUT, the chart is overbought on a neartermed basis. A retracement to the 50 day (10 week) SMA (green line on chart) is likely. So lets say a 10% +/- correction is possible. Even probable. That would bring it right back to the old resistance neckline of the low $60’s. My view, so long as a break of that support zone doesn’t occur, is to remain bullish on the sector. Allow me to quote my own reply to the reader who enquired about my stance on energy stocks being ready for a correction:
“It is overbought but not over. I recall I got the same kind of question in the fall – oil was overbought, and I said yes it will have a normal pullback, then rally back and go on to new highs. It did precisely that.
My view is the same now–I anticipate a pullback, but not a trend break – and an eventual new high. So you have to decide (if you agree with me) – will YOU lighten positions now and have the timing ability to go back in if as when it declines?
Ultimately, inflation is real, COVID version 2.0 is ending – meaning more travel etc, NA supply is limited – exploration was capped precisely at the wrong time for the wrong reasons by Dumb & Dumber (Biden & Trudeau), Saudi is NOT opening the taps, and Russia is a wildcard.”
In other words. I’m anticipating a neartermed pullback. Yet, I remain in the trade with only a small interest in flipping a trade in the short term. We may reduce positions and play the overbought trade, but not aggressively. The case remains strong for inflation, and for oil in particular. Read my last 4000 blogs since 2020 on the inflation subject (ok, so I exaggerate the number of blogs – but its been ALOT). That’s my two cents worth. Take it as you wish.
We talk a lot about oil which is great. However, nat gas is showing some strength and looks to be poised to break out in a big way. What do you think?
Absolutely Dave. We hold gassy stocks too.
Hi Keith what do you think about financial
Sector is it over bought or still have room to run , we’re do you see more opportunities in u.s. or Canadian financials
The US financials (broadly speaking) are consolidating. I feel that they can move higher into the spring. We hold financials on both sides of the border and we hold a mix of banks and insurance. TSX banks are parabolic. We don’t think the sector will crash, although a correction is overdue. But if it roll over we will sell. Rising rates are bullish for the sector, but trend comes first. So far we don’t see too much to be concerned about. As is everything- subject to change! Trend rules.
Hey Keith you use the term or one similar as “don’t catch the sword going down”. I wonder if institutional investors may be willing to catch it part way down after a dramatic decline, but still dropping? An example is where a very large market cap company, with over 73% institutional ownership. If it drops say 20%, and dumb money is unloading, then someone is buying. Assume the fundamentals largely are in tack. So who would be buying the large volumes, I got to think institutions are buying on a dip, knowing dumb money ivestor sentiment is low now but smart money says the stock will recover. Thoughts?
Yes there are points where smart money does start to step in early–although they do tend to follow a leg-in program. This is why I follow a leg-in or leg-out strategy (please see my Technical Analysis Course for the exact strategy). I didn’t invent the strategy, I learned it from a successful pro trader many years ago – it is commonly followed within the smart money world. Retail investors can adapt to this little secret strategy.
You and I don’t have to buy during the decline. We can monitor smart/dumb money via things like the Sentimentrader smart/dumb compilation for longer termed moves–and for the nearterm we can monitor put/call, vix, and even morning/afternoon moves. And we can wait for a base. I describe these and give examples in my book – Smart Money/Dumb Money. And in the course.