Why You Should Avoid NASDAQ Stocks Right Now
Thursday, July 12, 2007 | Chris RoweRating:
At the end of this article, I'm going to expose the silent partner behind Tycoon. The brains behind the operation, if you will. You'll finally be able to put a face to the brain! But first, an important article that may save you some money. Tip of the day: Never be afraid to sit in a money market account, or to to hedge your bullish positions, or play the downside.
Why Should You Avoid NASDAQ Stocks?
One word: Seasonality.
Broken Record Reminder: You must take a synergistic approach to trading. That is, you should never rely on just one tool or indicator when making trading decisions. It isn't a good idea to make decisions solely on seasonal trends, but instead, you should use different tools and indicators to confirm what another is telling you.
Market internals (breadth) have been weakening for some time now, especially for the NASDAQ. (Major indices tend to follow what happens internally.) While small and mid-cap stocks had been outperforming large caps for years, that trend ran into a wall, showing fewer bets being placed on higher risk stocks (and the NASDAQ is considered to hold higher risk and reward).
The NYSE has shown both internal and external strength recently against the NASDAQ, as financials lead the way higher. But when a market runs higher, you want to see the NASDAQ outperforming the NYSE, not the other way around. And now, after gradually seeing the NASDAQ fall apart internally, we're seeing the NYSE doing the same thing as financials (yesterday's leaders) have spent the last week breaking five-year trends on the downside. Usually, the leaders up are the leaders down, and usually, financials lead the S&P500 large cap index.
Generally speaking, the market has shown decreasing momentum with each major index showing MACD sell signals after being overbought, and negative divergences across the board (S&P, NYSE, NASDAQ, Dow-30).
So Why Avoid the NASDAQ in Particular?
I published an article on June 21 titled "Trading Secret: 12-day sweet spot coming in 6 Days!" (click to read it).
In it, I talk about the seasonal 12-trading-day rally that typically occurs in the NASDAQ. Basically, since 1987, the NASDAQ gained 3.2% on average during this 12-day sweet spot if you don't count last year. (Counting last year, the average gain since 1987 was 2.6%. Still, a heck of a 12-day rally for a major index.)
So if you were wondering why we've seen the NASDAQ showing strong relative strength against the NYSE or S&P500 over the past couple of weeks, it has a lot to do with the seasonal sweet spot (which, by the way, ends at tomorrow's close).
"Chris, I'm not going to ask you again: Why should we avoid the NASDAQ?"
OKAY-OKAY!
July comes in second to September as the worst performing month of the year for the NASDAQ (on average, down 0.09% since 1987). Typically, we see a strong start, followed by a sharp sell-off in the NASDAQ in mid-July, with a recovery toward the end (but obviously not a huge recovery since July is the second worst performer).
Also, July is the start of the "worst four months" for the NASDAQ. It's basically the NASDAQ's version of the old saying, "Sell in May, go away."
You should also know that July happens to be the strongest month of the third quarter for the Dow and the S&P500. So typically, we see the NASDAQ outperform the S&P500 and Dow during the 12-day sweet spot, and then the tables are reversed for the remainder of the month.
Here's how the NASDAQ 12-trading day sweet spot panned out vs. the S&P500 so far (as of the market's close, Wednesday July 11, 2007).
You can see that the NASDAQ Composite (black line) is up about 3% so far, and the S&P500 is up about 1.7%. (This would have made a good "spread trade" using options, but that's another story.)
AGAIN, seasonal factors consider the average return over several decades, so this is certainly not that "holy grail" you've been searching for. Anything could happen. But we need to stack the odds in our favor, and one way to help with that is to consider what I've just told you about seasonal trends.
And now, for the moment you've all been waiting for! A look at the silent partner, behind the scenes of Tycoon. The shot caller. The analyst. The undisputed, undefeated, feather weight ... Okay, I'll stop. Check out my daughter Maya, along with a shameless plug ...
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“Profit from the Trend”
Chris Rowe
Chief Investment Officer
The Trend Rider
