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Trade Prep: Is the Stock Market in Trouble?

The stock market is open for business today.

But bonds get a break on Columbus Day. That gives investors plenty of time to rack their brains over a potentially calamitous bond market shakeup that could continue to weigh on stocks.

Early Friday morning, we took a quick tour of the carnage in the bond market as yields shot up to their highest levels in seven years. With the 10-year treasury yield above 3.2%, analysts and pundits are fretting over the battered bond market’s effect on stocks as the Fed signals additional rate hikes on the horizon.

Last week’s bond breakdown has led to a precarious start to fourth-quarter trade. A stealth correction in small-cap and technology shares quickly spread to the broad market. The Nasdaq Composite dropped more than 3.2% on the week as volatility spiked. Meanwhile, the S&P 500 posted its worst week since June, the Financial Times notes.

The new trading week is already off to a rocky start as Chinese stocks are sliding almost 5% this morning as the market reopens following a weeklong holiday. U.S. futures are now firmly in the red as the opening bell approaches.

Strap in! Here’s your exclusive trade prep for the week of October 8th:

Tactic

Last week, a massive performance gap opened between the Dow Jones Industrial Average and the Nasdaq Composite. While the Dow retreated from its all-time highs Thursday and Friday to finish the week just below breakeven, the Nasdaq cratered as investors fled the formerly red-hot tech sector.

Tech stocks

Trading is about being at the right place at the right time. If we continue to see tech shares break down this week, we’ll need to pivot to other corners of the market in search of viable plays.

Fortunately, we’ve built key positions in several Dow stocks since the first rumblings of a trade war snapback over the summer. Johnson & Johnson (NYSE:JNJ), McDonald’s (NYSE:MCD), and JP Morgan Chase (NYSE:JPM) have held up exceptionally well during this recent turmoil. We can lean on these trades if popular tech stocks continue to break down.

Trade

It’s no secret that momentum stocks took a beating last week. Technology and consumer discretionary names have been hit the hardest as skittish traders move to protect profits.

We’ll be watching these areas of the market closely as trading resumes this morning. Specifically, I want to see where semiconductors land. The VanEck Vectors Semiconductor ETF (NYSE:SMH) sliced below its 200-day moving average late last week, sending shares tumbling back toward their August lows.

Remember, these former market leaders have been coiling for better part of the past six months. Bulls will want SMH to hold this important support level as we head into the new trading week:

SMH

A bounce at these levels could set up a favorable trade in select semiconductor stocks. If these names can take back a leadership position, it will bode well for the rest of the market.

Takeaway

Jack Bogle once said if you have trouble fathoming a 20% loss in the stock market, you shouldn’t be in stocks.

After months of smooth sailing, it’s easy to forget that momentum works both ways! A formerly forgiving market just slapped us in the face with a hard reset. Now it’s time to pick up the pieces and prepare for the next big move.

In this environment, it’s crucial to maintain your composure. Don’t get sucked into making emotional, kneejerk trades as the market gets volatile. Instead, let’s take a step back and see how stocks respond to begin the new trading week. We’ll have the opportunity to develop a clear (and profitable!) plan once the dust settles.

Sincerely,

Greg Guenthner

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Greg Guenthner

Greg Guenthner, CMT, is the editor of Rude Awakening PRO and Seven Figure Signals. He has been with Agora Financial/Seven Figure Publishing for 13 years. In 2018, Greg’s Rude Awakening PRO portfolio beat the S&P 500 by 14%.

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