It’s time for the defense to take the field! (And no, I’m not talking about Sunday’s big game.)
Over the last few weeks, the stock market has become more turbulent. Stocks have been swinging higher and lower (sometimes quite a bit lower). And investors have a lot of issues to be concerned about.
Concerns include:
- Rising interest rates.
- Heightened inflation.
- Corporate profit uncertainty.
- Russia / Ukraine unrest.
- Higher oil and natural gas prices.
- Expensive stock valuations
- And the list goes on.
I’m still very bullish on the overall economic recovery. And there are still so many great opportunities for investors.
But one key signal popped up on my radar this weekend. And based on this pending “death cross” pattern, I’m calling an audible and putting the defensive team on the field.
The idea here is to protect your wealth in today’s market, so you can thrive when the Wall Street bulls once again have the ball.
A Death Cross Signal from the Nasdaq
In January, I wrote a piece on “death cross charts” — a chart pattern that can indicate a change in trend, and ultimately lead to a sharp drop.
At the time, this pattern was popping up for a few of the most over-priced speculative stocks in the market.
But this week, the Nasdaq Composite got a lot closer to completing the death cross pattern for the entire index.
A death cross pattern occurs when a short-term moving average crosses below a longer-term moving average line. And in the chart above, the 50-day moving average is about to cross below the 200-day average.
This particular death cross setup is watched carefully by trend traders and could lead to a much larger selloff once the pattern is complete.
Now, there’s nothing “magical” about the 50-day average crossing below the 200-day. But if the signal causes many rules-based trend traders to bail out of existing positions — or set up new short positions — it could lead to a lot more selling in the weeks to come.
Technology Stocks are Most Vulnerable
Although the Nasdaq Composite is weakening, that doesn’t mean your investment account has to lose money.
And it doesn’t even mean you need to pull all of your cash out of the market.
But you do need to understand which areas are most risky, and how to play good defense with your investments.
Tech stocks pose the biggest risk to your portfolio right now. That’s because many companies in this area have high stock prices compared to earnings per share.
As interest rates rise and investors take a more cautious approach, these prices could trade sharply lower — even while the companies themselves do just fine!
The Nasdaq Composite is full of tech stocks — with technology stocks comprising more than half of the index as of January 20. So as tech stocks fall, so does the Nasdaq Composite.
Also, if trend traders start to short the Nasdaq Composite when the death cross signal is complete, that selling pressure will naturally drive tech stocks lower.
Selling some of your tech shares now is a good way of playing defense and giving yourself a chance to sidestep this particular risk.
The good news is that if you invest in stronger areas of the market today (like financial stocks, energy plays, and maybe even some travel and leisure reopen plays), you’ll be able to make money elsewhere.
Then, once the Nasdaq Composite has had a chance to pull back and reset, you can invest in some of the same names that are vulnerable today. Only you may be able to buy shares at a big discount to where they’re trading right now.
Bottom line, this is a good time to play defense and protect your wealth. Don’t give back the profits you’ve worked so hard to build!
Here’s to growing and protecting your wealth,
Zach