A Pair of Tax Loss Rally Candidates to Consider
The Market
At least we did not see any cheerleading for the market on Monday. And for the first time in more than a week, the market closed on the low of the day. As you know, I have been harping away about the sentiment, and I think we have got to change sentiment for that oversold condition to matter. (more on that below)
The best news on the sentiment front I can offer is that the Daily Sentiment Indicator (DSI) has come down to 37 for the S&P and 35 for Nasdaq. It has been many months since we have even seen this slip below 40. That is a step in the right direction.
As a reminder, the DSI is on a scale of zero to one hundred. When we get a reading under 15, my antenna goes up. Over 85, my antenna goes up too. Single digits and we are buyers. Over 90 and we are sellers.
Most recently, we saw Oil’s DSI get to 90, and I recommended selling Valero. Also, in September we saw the DSI for bonds get to 9, and I was a buyer of bonds. We don’t always get the perfect setup. For example, sometimes the readings only get to 18 or 20 or 85 or 87, but patience is usually a virtue. And profitable.
With that in mind, let’s take a look at the Nasdaq Momentum Indicator. I indicated last week, Nasdaq was no longer oversold, and it still is not. Using my own overbought/oversold oscillator, it is not oversold on a short-term basis.
For the Nasdaq Momentum Indicator, I use price as the input (instead of breadth), and so what I do is plug in lower prices over the next week or so to see when the indicator not only stops going down but when it goes up. Nasdaq actually goes up starting Wednesday/Thursday this week but then scoots right back down. But then next week it gives a much better setup.
What does all of this mean? If we’re looking for the point in time Nasdaq will be back to a decent short-term oversold condition, then I think we’d have to look at some time next week, not this week.
If I had to map out a scenario, I would say maybe we rally Wednesday/Thursday and head back down. And perhaps by then that DSI reading is at least a teenager by then. The good news is that the VIX’s DSI, which you may recall two weeks ago was a teenager (15), is now 37, so there is finally a runway with that indicator.
New Ideas
In the tax loss rally category, I would put GE Aerospace ($GE). It’s had a bit of a run already, so I would love to see it pull back something akin to what I have drawn in blue.
Today’s Indicator
The 30 day moving average of the advance/decline line is not yet overbought.
Q&A/Reader’s Feedback
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Robinhood Markets ($HOOD) is oversold and has some support down here. However, it is not a chart I can get behind right now. Any oversold rally looks to me like it will run into a lot of trouble at 95 at best. Now, let me note if we get to a point where there is panic in tech stocks, I would gladly put this on the list to buy for a trade. Otherwise, I’m a seller on rallies.
AT&T ($T) is a terrible chart, but lo and behold, it’s probably a decent year-end tax-loss selling candidate. It’s got the dividend folks might like, and a rally to 23 is actually nearly ten percent! It’s worth a try.
I have been sucked into $KWEB, an ETF to be long Chinese tech stocks, more often than I care to admit. Get this over 24, and my interest is piqued. Get it over 25, and that would be the first time it has made a higher high in three months. Is it worth a shot? Not unless it gets over 24 or gives us a W bottom.
$XLF, an ETF to be long financials, has had a terrific run. My pick in the group has been Goldman Sachs ($GS), which, after a nice run, I decided late last week I thought we should take some profits in. XLF itself hasn’t done anything wrong, but it is heading into resistance and getting overbought. I’d lean toward booking some profits or at least not adding to it, although I think JP Morgan ($JPM) should rally a bit more, especially if it can get over 345.
