Beware of the suckers rally. In the past year, every time the NASDAQ pierced its 50-day moving averages, stocks floundered for at least two months. In fact, the key benchmark breach made good on the axiom to “sell in May and go away.” Stocks didn’t bypass March 2012’s high until early September.
ETF Stocks’ warning stems from another pattern we witnessed on the charts. In the past year, shortly after the index fell below its 50-day mark for the first time, bulls ignited a rally -- a suckers rally of at least 100 points on the NASDAQ and then selloff number two begins.
This time last year, the secondary selloff wasn’t as deep as the previous pivot low, and then buyers put on their running shoes for the next three months. In the summer, investors weren’t so lucky. Following the 100 point recovery, the indexes stumbled badly for the next month, shedding nearly 10% in a month. After bottoming on June 4th, stocks steadily meandered higher on QE3 hopes, finally getting by March’s highs in September.
We are unsure as to when stocks will try to recover recently lost ground. Last week, the Dow and S&P joined the NASDAQ in establishing downtrends on their charts. The indexes dropped below their September lows before clearly hitting new highs. This “stepping down” action of lower highs and lower lows is the definition of a downtrend.
Making the right call in this type of environment is difficult. Recent history says stocks should pop sometime soon, but the charts suggest weakness. So, what do you do? This is how ETF Stocks might move forward.
If the NASDAQ closes on top of 3,075ish, we would consider adding stocks and then raising cash as the index approaches 3,150. On the other hand, if the index moves below 3,050, investors might consider buying an inverse ETF such as ProShares Short QQQ (PSQ). It will go up as the NASDAQ 100 falls. Around, 2,975ish, we’d start thinking about taking profits on PSQ and start nibbling on leaders.
It’s going to be a tricky period in the next few days/weeks. Investors will have to be careful. From experience, we have found that chasing stocks from day-to-day in this sort of environment can be a profit killer. Have a plan that’s comfortable for you and execute it, just don’t let small losses turn into big losses.