Momentum Monday – The Chop Is Back

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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.

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