Trading Desk: The Bull Run Shifts Into Neutral Gear

Something very important happened this week that just isn’t mentioned in the mainstream investment media. They’ll tell you stocks ended a four-week winning streak. But they can’t tell you why.

Look at the NASDAQ. It climbed a healthy 24% since mid-June with the bulk of that gain coming in the past month. Then it started moving backward.

The S&P 500 and the Dow industrials tell a similar story, but it’s easier for someone who can read a stock chart to explain it. The S&P 500 rallied until it converged with the 200-day trend . . . roughly where it’s been on average for the past year. Then it failed to break above that line.

When a security breaks below a trend line like the S&P 500 did back in April, we call that line resistance. It’s a ceiling that becomes statistically hard to rise above, truly resisting the bulls’ best efforts.

You can always break resistance, but it requires energy (money) and effort. Generally investors need a good reason to believe the future will be better than the past that formed that trend line, data point by data point.

If they don’t have that reason, resistance generally remains in place and any breaks will be temporary, tentative and almost accidental. There’s little reason to assume that the future for the S&P 500 right now looks any better than the past.

For those following the Fed and the economy, it probably looks worse. Interest rates and inflation are ravaging profit margins. Many stocks, sectors and themes are in an earnings recession right now.

You can make up for that drag by focusing on stocks that aren’t feeling quite so much pain or will be able to shake it off faster than the market as a whole. Buy energy stocks. Buy small tech. Buy IPOs with endless potential.

But don’t buy the banks. Or the retailers. And be careful with big tech.

I can’t help but notice that Microsoft (MSFT) hit 200-day resistance this week and dropped. So did Amazon (AMZN). With those two giants back on the defensive, the broad market is naturally going to have trouble pushing forward.

And when momentum falters, it only takes one trillion-dollar giant to weigh on Apple (AAPL) and Alphabet (GOOG). Live by the index fund, die by the index fund.

What still looks good? I have to say energy has no resistance above it but the traces of its own historical exuberance. It can run as far as it can . . . and winter is coming.

Tech took its best shot and failed. I don’t see it moving a long way up from here before earnings in October. That could be a great season or a scary one reminiscent of 2018, with serious downside if the giants run out of steam.

Communications stocks are dead money at this point. If the group drops more than 3% from here, support evaporates and Meta (META) and Netflix (NFLX) can fall a long way through the fading floor.

META in particular looks vulnerable. This is probably not the kind of dip I’d want to buy there.

Materials stocks and the REITs are an open question. On one hand, inflation gives them higher prices. On the other, costs are eating them alive. Buy commodities instead if you just want an inflation hedge.

Healthcare and the utilities are flying a little too high right now. Fear is back in play, behind the scenes. I bet you won’t find much of that in the mainstream market media either.

When you see Big Pharma and the utilities start dropping again, you’ll know the market as a whole is ready to shake recent excesses out of its system and get back to work.

Stick close to what works. Don’t chase what’s obviously broken. You’ll get better entries ahead. What is Warren Buffett buying? Occidental Petroleum (OXY). As much as he can grab.

That says it all.