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Is It Time To Buy A Bottom In Tech Stocks? (Depends On Answer To This Question) – Mike Swanson (05/12/2021)

We have seen the Nasdaq slide over the past week and on Tuesday it gapped down big to cause drops of over 5% in many fad big cap tech stock plays, including TSLA, on the open. The DOW also got dragged down by noon to decline over 550 points at one point. But dip buyers came into the big cap tech fad plays in the last two hours of trading to help take away most of the losses of the day on them.

Many are calling a bottom in these stocks right now.

Is it time to buy?

That depends on the answer to one key question.

First, when you look at the chart of the Nasdaq it actually says not to buy, even with the rally off of the open Tuesday.

Last week I talked about how the $13500 level was key support on the Nasdaq and if it closed below that we’d likely see a correction begin, that could lead to a bottom around its 200-day moving average, which is the green line on the chart above. The reason this chart says not to buy Nasdaq stocks, though, is because of what the indicator on the bottom of the chart is doing.

That’s the relative strength ratio showing the performance of the Nasdaq versus the S&P 500. It’s been going down since February to tell us that the Nasdaq stocks are now badly lagging the S&P 500 and many other sectors of the market. If you want to beat the market you want to buy and be in the things doing that. The Nasdaq is not and that’s why the chart says not to buy.

But what about a big bottom like people are calling now?

Well if the bottom is now then ok you can buy, but there is no sure sign that there is one. Typically bottoms end in panic and there is none yet in the options market.

So, the question is – is this market just pausing or correcting?

If it’s the latter then don’t buy now, don’t even try, even if the Nasdaq trades green today, until there is real panic selling in the markets.

Many people are new to trading, having opened up Robinhood Accounts in the past year, and really don’t have a way to answer this question of whether the market is simply pausing or correcting. All they do is look at the daily price gyrations when they load up their Robinhood Account, because that is all it shows them.

To answer it you have to figure out why the market is actually dropping and what came before the February peak in performance in the Nasdaq and why it is now lagging, along with so many popular most widely owned stocks on Robinhood and things that specialize in them such as ETF’s like BUZZ and ARKK.

The reality is a herd developed in the markets that took on more risks. People basically piled into the same stocks owned by these ETF’s and listed as popular stocks on Robinhood. It’s like what happened with GME earlier this year.

A herd in the markets can drive a group of stocks up, but once they are all-in things peak and go back down. You’ve seen it many times with individual crypto coins, like DOGE this weekend, and Bitcoin many times in the past if you watched it in 2017. Now this herd appears to have run out of steam.

This moment was going to come, because it put on record margin debt, meaning it borrowed money to buy more stocks.

This month started with record margin debt, much of it when it comes to individual traders focused on the Robinhood popular stocks. Now it doesn’t necessarily mean the market is topping like it did in 2000 or 2007, but it is true that big margin debt players lead to corrections that end in panic.

Buying stocks on borrowed money is not a good idea.

And the problem is there is no panic in the markets, so there is no true sign to the end of this correction if you want to buy something.

But it doesn’t matter, because there are other things to buy now that the things the masses are ignoring.

The biggest trend happening in front of us is the growth of inflation starting.

The masses aren’t playing that at all.

There are sectors and stocks going up even with the weakness in the Nasdaq. Those are the things to now focus on.

One such opportunity is in silver.

Silver went up yesterday and went up last week as the Nasdaq fell. It’s now aiming for its $28.00 resistance price.

And yesterday the GDX gold stocks ETF, which I own in my IRA, went up too. Of course the top small cap mining stocks tend to go up even more when the GDX goes up. That’s why I’m excited about my top stock pick for this month.

There is not a single mining stock or metals ETF in the list of top 100 most owned Robinhood stocks right now. The masses are completely asleep on this while being all-in on fad tech stocks. Getting out of them and into things they aren’t in is the key play now, imho. I see no reason for someone to stay invested in a boat of fad stocks getting sunk by all the bloated margin debt.

I actually have a small Robinhood Account I use for educational purposes. I did a video update on it Monday and ten stocks I own in it you can find here.

I’ll think about a Nasdaq bottom when the VIX gets to 30.

Will write about this key indicator tomorrow and explain it to you so that you know how to use it.