Over the last week, I started to lean towards the possibility that a "summer shakeout" may be approaching. There are times when I'm wrong when I get a hunch that a correction is about to take place. When this happens, it's really no big deal as I can quickly ramp up exposure if a strong uptrend resumes. However, I've always felt it is best to be cautious since it can take months to recover from large account drawdown. The way I see it, if I see trouble ahead, I simply step aside until I can gain some clarity. Let's take a look at the market's action over the last few weeks.
Indexes
While the Nasdaq Composite and S&P 500 have been in solid uptrends this year, there are a few red flags that have caught my eye. First, we did see some distribution in the Nasdaq this week, and the S&P 500 is very extended from its' long-term moving averages. In addition, the Russell 2000 has been severely lagging over the last month. It's failure to participate recently is not something I like to see.
Action of Leading Stocks
I've also noticed a common theme amongst the stocks I follow. Most of them are either extended, have lost major support levels, or are are building very large bases. The last group intrigues me the most. Some of these stocks such as SHOP, NET, CRWD, TSLA, ROKU, DOMO, PYPL, SQ, SNAP, RH, DOCU, SE, and ZS are forming beautiful bases. They just look like they may need some more time to round out. That is why I titled the post "Summer Shakeout," as I think we may see a shakeout in the coming weeks followed by a strong advance in many of these stocks in the fall.
As I mentioned earlier, many of the stocks I have traded over the past few months have either broken down or are very extended. RBLX, VSTO, and YETI are now below their 50-day moving averages. UPWK had a nasty reversal this week while MRNA has become extended on news that it will now join the S&P 500.
This type of action is also evident in the fact that the percentage of Nasdaq stocks above their 50-day moving average has been declining while the QQQ and Nasdaq Composite have been in strong uptrends. This indicates that there is clear weakness below the surface while a few large stocks are holding up the indexes.
Seasonality
We are also approaching August and September which are notoriously bad months for trading. The fact that earnings announcements are to be released in the coming weeks also adds to the likelihood of increased volatility.
So what does all this mean? For me, it's rather simple. As usual, the emphasis should be on risk management. I was quick to sell stocks such as RBLX which lost their 50-day moving average. I also cut some positions that were acting sluggish for small gains to raise cash. However, I still plan to keep my shares of NVDA until it loses major support. Most importantly, I'm continuing to monitor the stocks that I mentioned earlier on a daily basis. Things can change very quickly on Wall Street. You can bet I'll be ready to buy some of those stocks if they set up in constructive buy points. The key is to have the patience to wait for the right opportunities to buy, even if that means having to sit through a "summer shakeout."
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