Q’s Signal End to Rally?

We continue to believe that the stock market has likely entered a new bear market and have positioned our portfolios to outperform if further market declines are in store. However, with short-term technical indicators signaling oversold conditions when the S&P 500 dropped to 1100 in early August, we decided to wait for a bounce to slightly modify our more aggressive portfolios. This strategy has been a wise one as the S&P 500 has risen 8.5% in a couple of weeks, and we decided to act yesterday. In our aggressive policies, we rotated a few more chips from cyclical sectors to defensive sectors.

Why did we act yesterday? Well, there are a few reasons but the main reason in my mind was the QQQ chart. The QQQ, which is an ETF that tracks the Nasdaq 100 Index, has been a leader for the overall market since the bull market bottom in 2009. With 14% of the index invested in Apple it is easy to understand why. In looking at the QQQ chart, I notice the price level has rallied back to the 50-day moving average (the blue line in the chart below). This moving average provided resistance to price advance yesterday and again today as the market rallied right back to that level again only to sell off heavily after reaching it. Additionally, the momentum of price as measured by the RSI hit the 2011 downtrend marked by the red line in the bottom panel. This indicator tells me that the bounce may be ending.

There are other reasons to suggest this bounce has run its course including separate technical indicators signaling that the market is now short-term overbought, but other analysts feel there may be more upside. Ned Davis is looking for 1250 on the rally (and possibly more) and John Kosar at Asbury Research is looking for 1275 based on a triangle break to the upside. They are probably right, as they have been at this much longer than I, but cashing in on the 8.5% bounce feels great…for now.