The iShares Russell 2000 ETF (IWM) declined close to 2% on Monday, so there's no denying it had a rough day. The other three indices, however, suffered only minor losses. With the SPDR S&P 500 Trust (SPY) and SPDR Dow Jones Industrial Average ETF (DIA) shedding roughly 0.35%, while the Powershares QQQ Trust (QQQ) declined less than a third of a percent.
So where was all the weakness?
Shares of momentum tech, biotech and solar were all taken out back and shot. GT Advanced Technologies (GTAT), a hot-money favorite in the solar sector, was clubbed for more than 15%. FireEye (FEYE), Yelp (YELP) and Splunk (SPLK) where all lower by 3.5 to 6%. Biotech darlings Repligen (RGEN), Jazz Pharmaceuticals (JAZZ) and InterMune (ITMN) all lost between 4% and 5% on the session.
Whether you attribute Monday's weakness to simple profit-taking, pre-earnings jitters or concerns related to how Neoguri (the first super typhoon of 2014) could impact Japan, the bottom line is the same. Much of what was strong throughout the month of June ended the first trading day of the week in the red. That said, unless your portfolio is heavily over-weighted in momentum stocks, I see little reason to fret over a single day of selling.
Let's shift gears for a moment and focus on the QQQ. It's no secret that the QQQ has been on absolute fire since breaking back above its 50-day simple moving average in mid-May. However, did you realize that in addition to closing above its upper Bollinger band on June 3 (for the third day in a row), it also registered its highest 14-day Relative Strength Index (RSI) reading going back to early 1999? Suffice it to say I was incredibly curious to see how the ETF performed during other times of such extreme RSI readings.
Going back roughly fifteen years, we see that the QQQ has registered an RSI reading close to the July 3 $82.25 print only a few times. And unfortunately for the bears, there's really no clear-cut negative to such a reading. Sure, such an RSI reading is indicative of potentially excessive optimism. But in no situation did the bottom proceed to fall off out of stocks.
Based on our exceptionally limited sample set above, it seems to me the best course of action (for bulls and bears alike) is to recognize that while price momentum is running red hot, we lack any sort of price action or major divergence telling us to batten down the hatches. My own preference would be to avoid adopting too bearish a posture until a lower swing low is triggered (with the current one sitting near $92). But at a minimum, I believe bears should wait for a break under the 20-day simple moving average (roughly $93.40).
Any trading or volume profile related questions can be posted in the comments section below, emailed to me at parkcityyeti@gmail.com or posted to my twitter feed @ByrneRWS
