Staying on the sidelines of the tech sell-off

Why one technical strategist is advising clients not to buy this dip

Apr 8, 2014 @ 7:52 am

The Nasdaq Composite Index has lost four percentage points in two and half days, led lower by technology and biotechnology. These have been the momentum darlings over the past year. What a difference a month makes.

Sterne Agee technical strategist Carter Worth advises clients not to buy this dip. He points to accelerating price erosion on accelerating volume, which resulted in a "key reversal" on Friday. (Higher high, lower low and lower close than the previous day — also called an “outside day.”) Bottom line: Selling begets selling and Mr. Worth is concerned.

As investors ponder how long the selling might last, we note 10 multiday declines for the S&P 500 Index of at least 1.8% during the past two years. The average decline was 4.3%. The current decline is 1.6%.

Long-term investors are accustomed to weathering selloffs, momentum investors are not. They hit the sell button. Active traders may find solace (and profits) in playing defense until the selling abates. Income-oriented sectors like REITs and utilities have been outperforming. (Recall our March 28 post, "Hip to Be Square.") So too are gold and 10-year bonds.

There will an opportunity to buy. For now we'll join Mr. Worth on the sidelines.

(Bloomberg News)

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