Last week, I reminded investors "stocks don't rise or fall in a straight line, so expecting some form of mean reversion is understandable," and this week, we saw high-flying NASDAQ stocks decline and lessor-loved baskets, such as industrial goods, climb.
This rotation isn't too surprising, given the Invesco QQQ ETF (QQQ) relative outperformance to the SPDR S&P 500 Trust ETF (SPY) since March. I suspect the S&P 500 will outperform the NASDAQ a little longer, but I also believe both will find their footing and resume up trends, because investors are sitting on gobs of zero-to-low yielding assets, and they're itching to buy dips.
Our overbought/oversold indicator is little changed this week.
About 34% of our 1,500-stock universe trades 5% or more above the 200-day moving average, a "cautionary" reading that suggests selling second-tier stocks and reducing margin. If this measure eclipses 40%, then it would signal it's time get more defensive, but prudently pruning portfolios and proactively picking prices to pay for stocks that go on sale makes sense for now.
Source: Top Stocks for Tomorrow.
To be clear, I don't recommend wholesale selling winners. Top-scoring stocks often continue winning long term, and historically, investors fail to buy back stocks for fear of incorrectly timing their reentry. If a stock has an impaired business model and you've got gains, then book some profit. However, if a company's targeting a large market opportunity and it's enjoying revenue and profit growth, then stick to your long-term thesis until it's broken.
That being said, suitability and concentration risk is a concern. Cloud software stocks have been big winners since March (and many remain top scoring in our research), but a portfolio consisting solely of these companies can expose investors to panic-inspiring, short-term drawdowns. If your holdings have become too concentrated, then using market weakness to hunt for stocks in
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