Conservative Investor? Why Now Is Your Time
The best way to make money in the stock market at this time is to avoid growth and technology stocks while you take some profits off the table.
The reality is that, despite the failure of the Dow Jones and S&P 500 to hold after establishing new record-highs last Tuesday, the stock market wants more reasons to bid stocks higher. The first-quarter earnings season saw about 70% of the S&P 500 companies beat earnings-per-share (EPS) estimates, but the results were largely based on lowered estimates by Wall Street.
Investors took the opportunity to take some profits following the rally last week. This indicates to me that there’s definitely still some vulnerability in the stock market.
Bellwether retailer Wal-Mart Stores Inc. (NYSE/WMT) reported soft results that suggest the global economy is still hesitant to spend after the company fell short on revenues and EPS. And to make matters worse, the company also revised its second-quarter estimates to below consensus. Clearly, the retail sector is struggling, and this will impact gross domestic product (GDP) growth.
On the charts, technology and growth stocks are risky. The Russell 2000 fell back below its 200-day moving average (MA) after failing to hold for the second time in just over a week.
We are seeing some selling capitulation in the small-cap area of the stock market and it could grow deeper.
Companies in the technology sector, specifically the high-momentum stocks, also remain under pressure, helping to drag the broader stock market lower. I don’t expect this to change anytime soon, so this is an area that you need to avoid, liquidate, or protect with put options.
A look at the chart of the NASDAQ continues to make me nervous, given the appearance of a bearish head-and-shoulders formation. The NASDAQ is within 1.5% of testing support at 4,000 again; on two previous occasions in 2014, the index has failed to hold at this point.
I would advise waiting for some sort of sustained support in the growth segment prior to jumping in. The current lack of leadership from technology will hamper the action in the broader stock market.
To play the technology weakness, look at shorting or buying put options on the Powershares QQQ (NASDAQ/QQQ) exchange-traded fund (ETF). Alternatively, you could consider buying an ETF like ProShares UltraShort Technology (NYSEArca/REW), which is based on the Dow Jones U.S. TechnologySM Index.
At this time in the stock market, the key is capital preservation.
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