Key Points
- Tech stocks, particularly in AI, cloud computing, and vehicle electrification, are driving the performance of the Nasdaq 100 and S&P 500.
- Stocks like Microsoft, Nvidia, Apple, Amazon, Alphabet, Tesla, and Meta have seen significant gains over the past three months.
- Sustaining these gains indefinitely is unlikely, even for the top-performing stocks.
- Investors often make mistakes of either expecting continuous gains or bailing out too early.
- Handling a pullback requires caution and avoiding adding to positions in stocks with recent healthy price gains.
- 5 stocks we like better than Alphabet
The Invesco QQQ NASDAQ: QQQ ETF finished 3.79% higher the week ended June 16, with slight gains following the Federal Reserve’s pause on rate increases.
The tech-laden Nasdaq 100 has been an exceptionally strong performer so far in 2023, but after any run-up, a pullback is inevitable as some investors nab some profits. Is a retreat imminent, and how should investors handle it?
To address that, let’s look at the Nasdaq 100’s recent returns over several rolling time frames:
- 1 month: 9.56%
- 3 months: 15.93%
- Year-to-date: 26.54%
That’s outperformed the S&P 500 in every one of those time frames.
Major indexes all pulled back on June 16, and with the market closed on June 19, futures were trading lower. It could be the start of a correction or not. Either way, investors should be prepared for the leaders to give up some gains at some point in the not-so-distant future.
Big Techs Still In The Lead
In the current environment, with the potential of AI, along with cloud-computing and vehicle electrification, causing what some analysts are considering a bubble, it’s a select group of stocks driving the performance of both the Nasdaq 100 and S&P 500. Those stocks, and their three-month gains, are:
Every single one of those gains, even “laggard” Apple, can’t be sustained indefinitely.
Two Common Investor Mistakes
Investors tend to make one of two big mistakes after stocks have been rallying for several months. The first mistake is to do “magical thinking,” which in this case means somehow believing a stock or an index can just keep rising and a pullback would be some kind of anomaly.
The second mistake is perhaps even worse and results in a big opportunity cost. That mistake is to bail out too early, believing the market is too frothy and a big correction is inevitable.
The first mistake is naive; the second happens when people get a little too smart for their own good, usually based on previous situations where they held a stock for too long.
How To Prepare For A Pullback
Fortunately, there are some ways to handle a normal pullback.
In the near term, exercise some caution. If you own any stock that’s posted healthy price gains in the past few months, and there are many, it’s best not to add to that position at this time. Many stocks are extended beyond entry points, which adds the risk of a pullback in the near term.
In particular, avoid chasing the hot tech winners of the past few months. If you’ve been reading all about the meteoric rise of Nvidia but feel you’ve missed out, a pullback could very well offer a new buy opportunity.
The QQQ ETF, which is a good proxy for the performance of big tech, closed 10.6% above its 50-day moving average on June 16. The SPDR S&P 500 ETF Trust NYSEARCA: SPY, which is also dominated by tech, but to a lesser degree than the Nasdaq, closed 5.3% above its 50-day line on June 16. That’s also an indication of an index that looks extended.
However: Avoid panic selling. Indexes can remain extended longer than logic may dictate. Sure, there are plenty of reports out there suggesting that the current rally is a bubble or “mirage.” Watch what markets are actually doing rather than going by the opinion of even well-respected analysts. After all, celebrity analysts and newsletter writers can be stunningly wrong at times, particularly when it comes to bearish predictions.
What May Happen Next
Here’s the ideal scenario, and it’s certainly plausible: The Nasdaq could retreat into a mild correction or even post that irritating and frustrating sideways trade for a while. This could help the leading stocks digest some of their gains as institutional investors pare their positions or at least stop adding.
New bases, or pullbacks to key moving averages, such as the 50-day or even the shorter-term 21-day line, would offer new buy opportunities for fundamentally strong stocks, expected to continue growing earnings and revenue.
There’s always the chance of a steeper correction, which could result in portfolio losses for investors who scooped up these big tech leaders in the past few months.
One way to evaluate performance without getting emotional about trades is to have a moving average or percentage decline target as a sell signal. That way, you’re preserving the gains you made and still have the capital to invest another day.
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