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Strength Is Revealed in Pullbacks: 3 Subtle Signs to Look For
“If they don’t wear you out, they’ll scare you out.”
US equities have been stuck in a lengthy, frustrating, and choppy downtrend since mid-July. However, stocks began to rally back in late October as bulls took back control with vengeance. In fact, the S&P 500 Index ETF chalked up its eighth straight session of gains on Wednesday.
While the rally has provided some much-needed relief for bulls, those caught in the downtrend earlier probably realize the significance of the old Wall Street adage, “If the market doesn’t scare you out, it will wear you out.” After such a frustrating period, it can be understandable for investors not to want to get back into the market with both feet – especially for those who missed the recent rally.
Strength is Revealed in the Pullback
Though it may sound counterintuitive, the strength (or lack thereof) in a rally is best displayed in the first pullback. As the major US Indices become more and more extended in the short term, investors should closely monitor how the market acts when it inevitably retreats. Not all pullbacks are created equally. With that in mind, investors should look for three subtle clues, including:
A Pullback Through Time, Not Price
A pullback through time occurs when an asset corrects in a horizontal or near-horizontal fashion after a bullish move. Corrections of this nature indicate a healthy digestion of previous gains as anxious sellers are met with fresh buyers. In the event of a pullback, look for the major indices to hold the top half of last week’s gains. For example, the Russell 2000 Index ETF launched higher by 7.5% last week and is down by 2.5% so far this week. If the bulls lose the top quadrant, it would indicate that sellers have regained control in the short term.Hold of Earnings Gap
Ultimately, earnings drive stock prices over time. This quarter, several stocks, such as Pinterest and Shopify gapped higher after better-than-expected earnings reports. If bulls are able to defend the earnings gap low, earnings-induces momentum will likely persist. Thus far, this is precisely what is occurring.
Breakout Retest & Resumption
Year-to-date, the tech-centric Nasdaq 100 Index is the leading index and has amassed gains of 41%. On Wall Street, leaders tend to lead in both directions. In the short term, investors should see if QQQ can hold its 50-day moving average. If the index successfully retests its breakout zone, a downtrend breakout should act as the final piece of bullish confirmation.
Bottom Line
Three subtle indicators are essential for investors to assess the market’s strength amid fluctuations. Make informed decisions by monitoring the depth of the pullback, earnings momentum, and pivotal zones.
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Since 2000, our top stock-picking strategies have blown away the S&P's +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. Today you can access their live picks without cost or obligation.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Investment Ideas feature highlights: S&P 500 Index ETF, Nasdaq 100 Index ETF, Russell 2000 Index ETF, Pinterest and Shopify
For Immediate Release
Chicago, IL – November 9, 2023 – Today, Zacks Investment Ideas feature highlights S&P 500 Index ETF (SPY - Free Report) , Nasdaq 100 Index ETF (QQQ - Free Report) , Russell 2000 Index ETF (IWM - Free Report) , Pinterest (PINS - Free Report) and Shopify (SHOP - Free Report) .
INVESTMENT IDEAS
Strength Is Revealed in Pullbacks: 3 Subtle Signs to Look For
“If they don’t wear you out, they’ll scare you out.”
US equities have been stuck in a lengthy, frustrating, and choppy downtrend since mid-July. However, stocks began to rally back in late October as bulls took back control with vengeance. In fact, the S&P 500 Index ETF chalked up its eighth straight session of gains on Wednesday.
While the rally has provided some much-needed relief for bulls, those caught in the downtrend earlier probably realize the significance of the old Wall Street adage, “If the market doesn’t scare you out, it will wear you out.” After such a frustrating period, it can be understandable for investors not to want to get back into the market with both feet – especially for those who missed the recent rally.
Strength is Revealed in the Pullback
Though it may sound counterintuitive, the strength (or lack thereof) in a rally is best displayed in the first pullback. As the major US Indices become more and more extended in the short term, investors should closely monitor how the market acts when it inevitably retreats. Not all pullbacks are created equally. With that in mind, investors should look for three subtle clues, including:
A Pullback Through Time, Not Price
A pullback through time occurs when an asset corrects in a horizontal or near-horizontal fashion after a bullish move. Corrections of this nature indicate a healthy digestion of previous gains as anxious sellers are met with fresh buyers. In the event of a pullback, look for the major indices to hold the top half of last week’s gains. For example, the Russell 2000 Index ETF launched higher by 7.5% last week and is down by 2.5% so far this week. If the bulls lose the top quadrant, it would indicate that sellers have regained control in the short term.Hold of Earnings Gap
Ultimately, earnings drive stock prices over time. This quarter, several stocks, such as Pinterest and Shopify gapped higher after better-than-expected earnings reports. If bulls are able to defend the earnings gap low, earnings-induces momentum will likely persist. Thus far, this is precisely what is occurring.
Breakout Retest & Resumption
Year-to-date, the tech-centric Nasdaq 100 Index is the leading index and has amassed gains of 41%. On Wall Street, leaders tend to lead in both directions. In the short term, investors should see if QQQ can hold its 50-day moving average. If the index successfully retests its breakout zone, a downtrend breakout should act as the final piece of bullish confirmation.
Bottom Line
Three subtle indicators are essential for investors to assess the market’s strength amid fluctuations. Make informed decisions by monitoring the depth of the pullback, earnings momentum, and pivotal zones.
Why Haven’t You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. Today you can access their live picks without cost or obligation.
See Stocks Free >>
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.