It’s happening again…
The stock market is pressing higher. And, I’m fighting it.
I’m not playing the contrarian role just to be argumentative. There are valid reasons to be cautious about the stock market. Valuations are astronomically high. The economic forecast is “cloudy” at best. Technical warning signs are flashing just about everywhere.
And now, my email is filling up with comments that are… well… let’s just say they’re less than courteous.
That’s usually the tipping point. Once my dear readers turn on me – with good reason, after being on the wrong side for several weeks – the market usually turns as well.
That is, after all, what happened just prior to the big decline earlier this year.
Loyal readers will recall my numerous cautious/bearish comments during the stock market rally in early February. One month later, it turned out that being cautious, as stocks pressed ever higher, wasn’t such a bad idea.
Today, there’re a lot of similarities to how the market was behaving in February. One of the most notable is the tremendous performance of the Nasdaq 100 – which is mostly technology stocks – and the divergence in the Nasdaq Summation Index (NASI).
A summation index is a momentum indicator. It measures the number of stocks moving higher or lower with the overall market. Strong trends have lots of participation from a higher number of stocks. So, if the market is moving up, it’s usually best if the summation index is moving up as well.
That wasn’t what happened in February. While the Nasdaq 100 moved higher, the NASI declined. That “negative divergence” was a strong warning sign of an impending change in trend.
We have the same conditions today.
Take a look at this chart of the Nasdaq 100 ETF (QQQ)…
Now, look at the Nasdaq Summation Index (NASI)…
You can see how negative divergence is fomenting on the NASI just as it did during the market rally in early February. As the market is moving higher, fewer and fewer stocks are participating.
This condition led to the big decline we experienced earlier this year. I suspect we’ll experience something similar over the next few weeks.
Best regards and good trading,
P.S. An important thing to note is that not all tech stocks are created equal. Just because a small number of stocks are holding up the Nasdaq right now, doesn’t mean there aren’t other good trade setups to be found.
You see, my colleague and tech expert Jeff Brown has a strategy that helps him find those exact kinds of setups in the tech sector. He calls them “timed stocks” – for how predictably they can hand investors profits at specific, predetermined times.
On Saturday, I plan to share a guest essay from Jeff that goes a bit more in depth. But until then, be sure to sign up for his free event taking place next Wednesday at 8 p.m. ET. to get all the details.
In today’s mailbag, Julian answers Monday’s Market Minute question about gold…
I carry a small collection of seven precious metals, miner stocks, and physical metals funds. I do this through thick and thin (such as the major dips you’ve mentioned). I use it as a hedge vs. cash holdings, and as an early phase “disaster” insurance.
Mining stocks proved useless during the March “disaster.” So, I might rethink my strategy.
Do you foresee mining stocks holding up during the downside Jeff sees coming? Or are you protecting your portfolio in a different way?
Send us your thoughts and questions at [email protected].
In Case You Missed It…
According to MarketWatch, ordinary Americans are being put on ‘restriction lists’, being banned from using certain businesses.
Why is this happening? And what does it mean for you?
Widely-followed geopolitical expert Nick Giambruno explains:
“This is just the beginning of a much larger movement I’ve been watching unfold for years in the United States.
Law-abiding Americans will soon have a critical decision to make.”
Will you be banned next?