MARKET EXTREMES PRECEDE MAJOR TREND CHANGES
We have commented on the importance of taking note of extremes of market behaviour in a series of previous posts and offer another current example for your consideration. It is illustrated by the accompanying chart which highlights the historic price discrepancy between the Nasdaq 100 and Nasdaq Composite indices.
The spread is truly historic, before the recent FAANG+ and Magnificent 7 driven markets the only time the Nasdaq 100 threatened to eclipse the entire Nasdaq Composite was at the top of the Internet Bubble. All major market moves have historically been led by a minority of stocks, but the narrowness of the current advance is without parallel with the top 5 stocks currently comprising about 32% of the Nasdaq 100 at the time of writing!
Participating in major market advances, regardless of their breadth, is essential to generate superior long-term returns. Most important is to stay alert for signs of a trend change so that the bulk of accrued profits can be preserved.
The current market environment is offering many opportunities, not only in U.S. stocks but in international markets as well. We’re happy to seize upon these opportunities to profit but are also mindful of the fragile macro environment in which markets are currently operating. Our risk management approach incorporates the use of position sizing and protective sell prices.
Enjoy rising markets but be aware that the investment landscape is strewn with catalysts for severe market volatility. The current bull move will eventually end, then the onus will be on the preservation of capital and the profit opportunities will lay on the short side of the market.