Daily Gains Letter

Investor Beware: More Selling Coming to Tech Stocks

By for Daily Gains Letter |

Beware of More Selling from TechnologyIf you’ve been keeping an eye on your screens and portfolio holdings (or if you’ve just taken a look), you are probably aware of the current selling capitulation towards small-cap stocks and the technology sector.

The bloodletting on Wall Street has been unabated and, in my view, it has been overdone. I’m not ready to jump in yet, but I would be on additional weakness in the stock market.

In a period of selling capitulation in the stock market, there is minimal regard for the quality of the stock. Sellers rush to the exits and dump everything along the way. I witnessed this on the stock markets in 2000 and again in 2008.

Yes, there is clearly a technical red flag on the growth stock market indices like the Russell 2000 and the NASDAQ. The Russell 2000 broke below its 200-day moving average (MA) last Tuesday, but managed to rally a bit on Thursday. If the buying support emerging continues, we could see the index rally back to its 50-day moving average; albeit, the risk is there in the stock market.

Just the fact that the technology group, which comprises many high-momentum Internet and social media stocks, is down more than 20% from its highs is worrisome. But at the same time, this isn’t really a surprise, given the advances made in 2013 and the previous years in the stock market.

Even with the stock market correction, we continue to see ridiculous valuations with the likes of such stocks as Yelp Inc. (NYSE/YELP), Groupon, Inc. (NASDAQ/GRPN), Facebook, Inc. (NASDAQ/FB), and Twitter, Inc. (NYSE/TWTR), meaning the bloodletting has not stopped, so you should stay out.

The fact is that if the current volatility makes you nervous, you should think about exiting some positions. But do not, by any means, dump everything, as the stock market will rally.

Technically, the Russell 2000 needs to hold above its 200-day MA. More importantly, my concern is with the state of the NASDAQ. So far this year, there have been two downside breaks of the NASDAQ to below 4,000, and the index is failing to hold up. We could be in the midst of another technical breakdown to below 4,000, so be careful.

The NASDAQ is also showing a bearish head-and-shoulders formation—an indication of lending weakness, based on my technical analysis. A look at the chart below shows a possible downside risk to around 3,900 or lower.

Nasdaq Composite Chart

Chart courtesy of www.StockCharts.com

A look at the investor sentiment readings suggests they are also a telltale sign. In fact, we last saw a bullish reading for the NASDAQ on April 22. Previous to that, the most recent bullish reading was on April 3. Last Wednesday, a bearish reading appeared for the first time since April 19.

What I suggest you do to protect against the downside risk in technology is to hedge with put options on the Powershares QQQ (NASDAQ/QQQ).

The safest thing to do at this time is simply to stay out of the stock market and wait for some sustained buying support to surface before moving back in from the sidelines.

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