After President Trump’s tweet about a potential 10% tariff on iPhone imports from China, investors’ heightened attention to technology stocks moved a notch higher.
Becky Quick of CNBC was in tune with investor concerns, as shown in this segment, but it was my answer to the spot-on question from Andrew Ross Sorkin on tech stocks that has generated the most emails. At a time when gurus’ calls are on both bullish and bearish sides, many investors found some clarity in “Here’s how to tell if stocks will enter a bear market or rise to new highs.”
Important events are ahead. Let’s update the situation with the help of a chart.
Please click here for an annotated chart of Nasdaq 100 ETF. I chose the chart of this ETF over the Dow Jones Industrial Average the S&P 500 ETF and the small-cap ETF because of dominance of tech stocks in the Nasdaq 100. The four largest components in the Nasdaq 100 are Apple, Amazon, Microsoft, and Google. Please note the following:
- The chart shows a move above the trend line. This is positive.
- The chart shows a very short-term bottoming pattern. This is positive.
- The chart shows RSI (relative strength index) divergence. In plain English, this means that although the price fell below a prior low, RSI did not go as low. This is a mild positive.
- As the chart shows, the overall pattern of RSI is positive.
- The low came on somewhat heavier volume. This is mildly positive. However, this is a low conviction point; a significantly higher volume would have increased the probability of this being a bottom.
- • As the chart shows, the rally is on low volume. This is negative.
- • Positive earnings from Salesforce and Nutanix are creating positive sentiment.
- Smart-money flows in semiconductor stocks such as Applied Materials and Micron Technology have turned to neutral from negative. Smart-money flows have been positive in Intel through most of the tech decline; interestingly, Intel has held up well during this period. Smart-money flows turned positive in AMD at the depth of the selloff. You already know from my writings over the years that smart-money flows have a great track record. The cherry on top is that smart-money flows were negative in Nvidia when the stock was trading around $290, momo (momentum) crowd flows were positive and it was the darling of tech investors. Smart-money flows stayed consistently negative on Nvidia, and ultimately the stock fell to as low as $133.
- • For the medium term, the bear is ready to pounce on some high-flying tech stocks. Popular high-flying tech stocks can be cut by 50% or more from their highs, as explained here.
What to do now
There are times to have high conviction because the data support it. Over the years, you have seen my calls on stocks ranging from sell everything or hedge in 2007, to go aggressively short in 2008 and then back up the truck and buy in 2009. You have also seen my calls to sell gold at $1,904 an ounce and silver at $50 an ounce, both of which turned out to be the tops.
The data do not support high conviction in the medium term at this time. In the short term, it all comes down to the Federal Reserve’s policy and the result of President Trump’s meeting with China’s President Xi.
For market timing, I follow the ZYX Asset Allocation Model, which has inputs in 10 categories.