Followers of our research already know that the latest market pullback is not like any of the others of the past two years.
For starters, it has now been 31 months since the last 10% S&P pullback.
The average bull market on the other hand sees a 10% pullback every 16 months, implying this bull market has likely gotten ahead of itself and is overdue two 10% pullbacks just for a mean reversion.
Statistical Trading – Good for the Long Term, Not the Short Term
Trading on statistics alone though is a dangerous game. For one, pulling money out of the market after the 16 month average would have had you missing out on the last 40%+ of price gains.
Another example, the” Sell-in-May-and-Go-Away” statistic suggests that over the long run buying stocks in October and selling in late April significantly outperforms holding stocks for the other six months.
And, over the long run this indeed is true as the Dow has returned on average over 7% per year since 1950 buying on November 1 and selling April 30. In contrast the other six months on average have returned less than 1%.
However, if you were to enact that strategy on any particular year, you might not fare so well.
Case in point: 2009’s May-October return of 17.4% significantly outperformed the traditionally better performing other six months of that year (only 4.8% gain). Many of the late 90’s years also saw the summer months perform as well or better than the winter months.
This year, however, selling in May just might turn out very favorably.
Better Strategy – Waiting for Price to Lead
Another thing significantly different about the latest market pullback is the way the former leaders have gotten slaughtered. As discussed in my previous article, ‘changing winds for the markets leaders’, the former market leaders have declined in price significantly more than other companies.
Amazon (NASDAQGS:AMZN) has now fallen over 20% from its price highs. Google (NASDAQGS:GOOG) is down 15%. These kinds of declines in market darlings (NASDAQGM:BIB) did not occur in pullbacks over the previous few years, not unless the broader market (NASDAQGM:SQQQ) was also participating in such large downside.
When leaders become laggards, savvy investors should perk up as it is a sign of overall market weakness.
That weakness may be setting up a very bearish pattern on the Nasdaq-100 ETF (NASDAQGM:QQQ) chart shown below and provided to our subscribers along with commentary the past few weeks when we first brought attention to the support level shown in red where the markets would likely get a bounce.
Video: Using technicals to capture an 8% gain in Apple
In our 4/13 Technical Forecast we highlighted the red support zone in the QQQ chart at $84 and suggested, “the Nasdaq has reached support levels and should bounce from here or at prices slightly lower.”
That bounce has now occurred and may be setting up the ominous bearish chart pattern shown in red in the QQQ chart below.
The head and shoulders pattern is just a fancy name to help keep tabs on supply and demand, which shows up through price patterns such as this one.
Price is what matters most to investors, and when price breaks below key levels of former demand, it can trigger further exodus as investors scramble to keep remaining profits.
This is what a head and shoulders pattern captures, the stall in investor demand (the left shoulder and head), the weakened attempts at any further upside (the right shoulder), and then the ultimate breakdown below key buying levels (the neckline support) that ultimately results in self fulfilling profit taking and further market (NYSEARCA:VIXY) declines.
The ETF Profit Strategy Newsletter and Technical Forecast keeps investors abreast of the changing winds of the market. The recent weakness by the Nasdaq and Small Cap indices is a new development in the market that needs to be watched as historically when former leaders become laggards it often precedes major trend changes.
Follow us on Twitter @ ETFguide