So, stocks are on the rebound and it sure feel good that last week’s sell-off was a blip, soon to be forgotten as a temporary correction in a cyclical bull market. But… what if the pullback is something else? What if the quick U-turn lower is a possible sign of more things to come?
In the last three years, the stock market has peaked in March or April, falling by 10% once and close to 20% twice. History never repeats verbatim, but traits tend border on plagiarism for years gone by.
Thankfully, investors should get a clearer picture from Wall Street in the days ahead. The classic definition of a downtrend is lower highs followed by lower lows. April put the two goalposts in place. On the upside, investors should be watching to see if the indexes hit new 52-week highs before falling below the bottom goalpost, last Thursday’s closing prices for the NASDAQ, Dow and S&P: lower highs followed by lower lows = a downtrend.
Worries of a turning point and possible downtrend could be put to rest if the indexes rip beyond April’s peaks, which would be confirmation that the uptrend lives.
Until the market makes a decision, investors should exercise caution and focus on the strongest of strong sectors. ETF Stocks sees Food and Drug Retailers and Biotech as the most bullish at the moment. Investors who have money burning a hole in their discount accounts might think about adding an exchange-traded-fund (ETF). PowerShares Dynamic Food & Beverage (PBJ) addresses the food part of the equation while iShares Nasdaq Biotechnology (IBB) provides coverage on the biotech side.
Now, there is no guarantee that either will make gains if the current rally turns out to be a head fake instead of a jailbreak higher, but both should outperform the broader market. That means going up a little more than other sectors if Wall Street moves beyond the upper goalpost, and falling at a slower pace if the lower goalpost is bypassed.
Hopefully, the indexes will clear up the ambiguity by the time we meet again.