Stay Nimble in This Overbought Market

Stocks retreated Tuesday as the major indices fell on profit-taking following three days of advances by high-beta stocks, a new all-time high in the S&P 500, and the Nasdaq’s close above 5,000.

The Dow and S&P 500 both fell 0.5%. The Nasdaq was off 0.6%, but it is still up 5.2% for the year and is just 1.4% from its record closing high of 5,049 made on March 10, 2000.

Biotech stocks were hard hit with the iShares NASDAQ Biotechnology Index (ETF) (NASDAQ:IBB) down 0.5%. Technology stocks also suffered, and iShares S&P NA Tec. Semi. Idx. Fd.(ETF) (NASDAQ:SOXX) fell 1.9%.

In corporate news, Best Buy Co Inc (NYSE:BBY) reported better-than-expected earnings and said it plans to begin a three-year, $1 billion stock buyback program. Shares rose 1.4%. AutoZone, Inc. (NYSE:AZO) and Dicks Sporting Goods Inc (NYSE:DKS) also rose following strong quarterly results.

Other gainers included energy stocks, thanks to the 1.9% rise in oil to $50.52 a barrel. Gold futures fell 0.3% to $1,204 an ounce, and Treasury prices fell driving the yield on the 10-year note up to 2.12%.

At Tuesday’s close, the Dow Jones Industrial Average fell 85 points to 18,203, the S&P 500 lost 10 points at 2,108, the Nasdaq was off 28 points at 4,980, and the Russell 2000 fell 8 points to 1,235.

The NYSE traded 3.3 billion shares, and the Nasdaq crossed 2 billion. On the Big Board, decliners outpaced advancers by 1.4-to-1, and on the Nasdaq, decliners were ahead by 1.9-to-1.

Nasdaq Chart
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Chart Key

From its low of 4,580 made on Feb. 2, the Nasdaq Composite has performed beyond my expectations. However, the index is now distinctly overpriced.

Friday’s high slightly exceeded the top of its upper Bollinger Band (2 standard deviations on a 7-day moving average) and then reversed. This, coupled with a declining MACD, is not a favorable near-term indication. However, the long term is still bullish.

S&P 500 Chart
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This S&P 500 chart shows minor reversals from Bollinger Band highs and lows that resulted in short-term trades. Note that the signals were most often tradable when the distance between the upper and lower bands was greatest and accompanied by supporting MACD signals, like those of mid-December (sell) and late January (buy).


Although the Nasdaq’s overbought condition warrants close attention, the stock market is long-term bullish. However, traders should watch the Bollinger Bands and use them to time trades.

But trading is only for the nimble. Even reliable indicators, like Bollinger Bands and my own Collins-Bollinger Reversal (CBR) system, which was derived from a long-term study of Bollinger reversals, are, at best, 60% reliable.

The prevailing long-term direction of the market is up, so any weakness, especially in biotech and tech, should be used to accumulate quality stocks.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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