Lower Highs for Stocks Are Confirmed

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Whether we look at the S&P 500 as represented by the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) or the Nasdaq stocks, i.e. the Nasdaq 100 as represented by the PowerShares QQQ Trust (ETF) (NASDAQ:QQQ), both indices are heavily exposed to mega-cap technology stocks.

stock market todayA lousy week for stocks last week ended on a low note as technology stocks continued to weigh on the indices. Many people that chased these stocks higher in late December and into January are now getting cornered and squeezed, which is leading to some forced selling and a much needed mean-reversion move lower.

Those stocks make up the majority of the QQQ ETF and a notable chunk of the SPY ETF. In fact, the technology sector makes up nearly 27% of the S&P 500. With that much weight on just a relatively few stocks, it should not be surprising that when they begin to tumble from very stretched highs, the broader stock market stands very little chance not to go lower. I have warned about that specific risk in this here column for months now.

This also once again proves the high correlation that is inherent within the stock market, i.e. when the broader market goes down then most stocks also drop (at least somewhat) and vice versa if the stock market rises.

As a result of last week’s selling, the weekly charts on just about all stock sectors look lousy. A retest of the February lows (or lower) now looks likely. 

Gold on the other hand had a great week last week in both absolute and relative terms. It’s still a choppy asset but maybe it is starting to gain some traction here. I am looking to possibly buy some this coming week for a trade.

Big Stock Charts


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Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week

On the weekly chart, we see that the SPY ETF after overshooting its longer-standing up-trend in Q4 2017 and into this past January is now in mean-reversion mode.

While it could find support at the yellow 50-week simple moving average for a bounce, ultimately and through a more intermediate term lens I would feel more comfortable putting longer-term money back to work if this index were to fall more into the middle of this range, i.e. closer to the $240-$245 area currently.


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Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week

The Nasdaq 100 QQQ ETF is trading notably higher above its longer-standing up-trend still and thus could also see relatively deeper mean-reversion to the downside.

From here, while large cap technology stocks are still a leading growth-oriented part of the stock market, active investors and traders could look to either short the QQQ ETF on any oversold bounces, buy an inverse ETF or buy put options or put spreads. A next downside target is the $155 area, followed by possibly $150. Any strong bullish reversal on a daily closing basis would serve as a stop loss.

In summary, markets remain very choppy and last week confirmed lower highs for many sectors and groups of stocks. The “less is more” approach that I have discussed in this column in recent weeks is paying off, as is a general de-risking of near to intermediate term long positions.

Check out Serge’s Trade of the Day for March 26.

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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