As I write this the stock market is poised to gap down this morning on a key technical indicator that brought in enough robot buying a month ago to cause the stock market to rally. Just as important as wondering if you should buy is to ask yourself what you should buy?
First should you buy?
The indicator I am talking about is of course the 150 and 200-day moving averages.
The DOW hit the 150-day ma in February and rallied and today is poised to open right on the 200-day moving average this morning.
The 150 and 200-day moving averages act as support in bull markets and bring in robot buying.
This is even more clear when you look at the more broad based S&P 500 which exactly hit its 200-day moving average in February.
As I wrote last Friday it is my hope that the market will rally off of its 200-day moving average.
However, hope is not really an investment strategy and I personally am not buying stocks based on a hope of a rally from here.
The problem is we are not in the same stock market environment that we were in a year ago when the market just went straight up and every dip was a buy. Now what we have seen in the past few weeks is an increase in stock market volatility that is only going to intensify.
We appear to be in the type of stock market drop that we saw play out from July 2015 to January 2016 in which the Nasdaq fell 20% and many fad stocks got smashed.
We have already seen Facebook blow up and TSLA too.
Yes I have no doubt that robots will buy off of this level, but if this level fails to hold this month then the robots will turn off their buying programs for a few hours and maybe even a day or two.
That alone will cause a lot of buying power to simply vanish from markets that have become dependent on robots and stock market buyback programs to go up.
That doesn’t mean it is going to crash to nothing, but that simply buying because the 200-day moving average is getting hit is not a good idea.
But what do you buy is just as important to think about now.
It is very tempting for people to simply buy the past fads and jump into stocks like Facebook, Google, Amazon, and Netflix.
Netflix in fact has been the top performing stock year to date in the Nasdaq 100.
Many of the fad stocks though have broken now and are no longer going to be market leaders.
We are actually in a time of rapid change in the markets in which the biggest financial bubble in human history is only starting to slowly unwind.
At times of change in the overall market structure you typically see a wild bout of volatility play out over several weeks and even a few months that leads to NEW market leadership.
When this drop is over I expect we’ll see a few new stock market sectors emerge as leaders that will destroy the performance of the fad stocks of last year going forward.
For instance in August of 2007 gold and mining stocks exploded higher and outperformed the stock market for twelve months.
In March of 2000 utility and tobacco stocks came out of long bear markets cycles of their own to outperform for almost 20 years the stock market averages. Philip Morris was a big winner. Now most of these stocks are among the worst of the past few months so I don’t expect them to repeat that performance.
I expect there will be new sector leadership that emerges in the coming weeks and that is what I’m focusing on now – not trying to buy the 200-day moving average or jump into past fads!
And yes I consider Bitcoin or crypto simply a passing fad of 2017 as the Bitcoin cartel has lost their price control.
One thing to do is look to find what is up this year while the market averages are down.
To name just one thing gold is actually up year to date and everyone is ignoring it.
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