Date: September 9, 2020

Sell the Rally – Bottom Not In

Stocks got hit with the ugly stick again on Tuesday. If you are keeping score at home, the NASDAQ 100 fell 11% in just three days. No one should be surprised this happened as I have been discussing it since mid-July. Sentiment got giddy and greedy, just like it was in February. Greed is almost always punished swiftly and sharply. Everyone’s favorite stock split plays, Tesla and Apple, plummeted 35% and 20% respectively. Zoom got hit for 27%. These are real numbers in a short period of time.

Last month I wrote about taking some profits in the highfliers and you would have thought I was committing treason. It was the right thing to do regardless of whether the Fab Five Plus went up or down from there. And now, I am going to go one step further and say that this group has gone from buying the dip to the selling the rip. In other words, I am more interested in selling rallies in these stocks than buying into weakness.

If you missed yesterday’s missive about the decline, you can read it here. Bears Not Ceding After Friday’s Reversal

Stocks are set to bounce this morning. I can easily see a two or three-day rally that wipes out Tuesday’s decline. My bigger concern is if we get this rally and then the Fab Five Plus start to rollover again. I don’t think the bottom is in. That would mean a further decline that could set off some trap door selling with that big whoosh on the downside. If we do get this rally, there may be an opportunity to do some pruning to reduce overall exposure.

I think it’s prudent to be a little more careful in the short-term. Make sure you really like what you own. While I do not believe the bull market is over, I do think that mega tech’s leadership will either be muted or end going forward. I am happy to be wrong here and I will probably end up chasing a bit if that’s the case, but many signs are there.

For now, let’s see if the bulls can muster more than an early morning rally and work off some of the oversold condition. It would be great to see a broadening of the rally with the Dow Industrials and Russell 2000 stepping up to lead.


Paul Schatz, President, Heritage Capital