The software continues to be the main game in town as the number of new covid cases in the U.S. has started to climb quickly again. Obviously, any company that works on a vaccine or offers diagnostic tests and protective gear is also in good shape. Gold and gold miners are consolidating near their 52-week highs and are looking constructively. The stocks of the rest of the sectors are slowly starting to roll down. The number of distribution days in the major stock indexes has increased significantly in the past couple of weeks, so it would not be a big surprise of even the Nasdaq 100 tests its 50-day moving average at some point in the next week or so. Dip buyers are still active and would welcome such pullback as a buying opportunity.
The market strives to be forward-looking. One can make the argument that it is currently discounting the potential of a second Covid wave or at the least, the realization that the virus might stay with us and impact every aspect of our lives for a lot longer than previously expected. This would explain the extreme strength in software, online retail, biotech, protective gear equipment, diagnostics test stocks last week. So many new all-time highs among those names. Even gold woke up from its nap last Friday. Clearly, the market is confident that the Fed will bail everyone out and it is trying to highlight the potential winners in a Covid world.
The indexes have the uncanny ability to erase two weeks gains in two days. Last week, we finally saw some deflation in the frothiness that had captured the market. Almost 99% of all stocks went down on Thursday. SPY dropped 6% testing its 200-day moving average. QQQ dropped 5% testing its 20-day EMA. Such big one-day drops often act as a wake-up call. The odds are that now the chasing is not going to be as mindless as in May but turning excessively bearish might be premature. Here’s why.
The price action in the past couple of months has created a buy the dip mentality which is likely to continue to support the indexes for the foreseeable future. This is not going to change easily. Even now, there are quite a few momentum stocks that are consolidating in a range and acting constructively. And yet, the trading environment has changed from a clear uptrend into choppy which requires a lot more nimbleness and careful tactical allocation.