These Are the Levels to Watch if You Want to Protect Your Portfolio

0 | By Shah Gilani

While market benchmarks – like the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite – all tend to go up together, they don’t always move up at the same pace.

But when markets go down, especially if they go down hard, they all tend to plummet at similar rates.

The key then to playing a potential market downdraft is to know what markets are really keying off and to know where support levels are in benchmark stocks and indices.

As stocks approach those levels, it’s a good idea to start setting up defensive parameters. And if they break those levels, it’s time to parlay a potentially ugly downside move into some beautiful profits.

Today I’m going to go over which levels should sound the alarm in your portfolio, and what you should do when – and if – they break them.

And, if you’re looking for a new way to make easy money no matter which way the market goes, stay tuned…

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The Power of FAANG Stocks

Again, here’s what we’re doing today.

  1. We’re looking at what big investors and trading desks are keying off now.
  2. I’ll show you what you can do to protect your investments.
  3. And I’ll show how to make money no matter which way the market is headed…

If it were possible to strip out extraneous influences on stocks and markets, they’d mostly trade off their fundamentals – metrics like revenue, expenses, margins, cash flow, and capital structure.

All that and more comes down to earnings. Earnings are mother’s milk to stock investors.

With about two-thirds (328) of companies in the S&P 500 reporting Q2 earnings, 82% have beaten analysts’ estimates by an average of 5.3%. Year-over-year earnings are up an average of 26.6%.

That’s after analysts furiously raised estimates based on tax cuts and better economic growth. And they’re raising forward earnings again. In fact, for the remainder of 2018, analysts have raised forward earnings estimates another 10.2% on average.

So, it’s not earnings that are going to weigh on markets. Rather, the three broad headwinds facing markets are:

  • The ability of leadership stocks to continue to lead markets higher;
  • Rising yields and signs of real inflation; and
  • Geopolitics, including potential fallout from trade wars.

For as long as the market’s been rallying, going way back to the spring of 2009, tech stocks have been leading the charge higher. There has occasionally been some rotation where financials or other sectors led for a quarter or two, but for the most of the ride higher, the stock market locomotive’s been powered by technology stocks. And of that group, the FAANG stocks and Microsoft Corp. (NasdaqGS:MSFT) have been the leadership darlings.

Of course, FAANG stands for Facebook Inc. (NasdaqGS:FB), Apple Inc. (NasdaqGS:AAPL), Inc. (NasdaqGS:AMZN), Netflix Inc. (NasdaqGS:NFLX), and Google’s parent company, Alphabet Inc. (NasdaqGS:GOOGL).

The Threat of a Negative Feedback Loop

The technical and, more importantly, mechanical problem the market faces is a negative feedback loop of selling begetting selling if leadership stocks start to decline.

Not only have these leadership stocks been going gangbusters on their own, each of them, with the minor exception of Netflix, weigh heavily in the benchmark indices they’re in.

When there are several of them in the same index, their combined weight drives performance.

Multiply their influence in indexes by their influence in ETFs that are loaded with them, and the mechanical problems – probably triggered by technical breaches if certain support levels are broken – are potentially frightening.

If these stocks begin to decline, confidence in the group will flounder and profit-taking will weigh further on them.

That’s when the negative feedback loop could be triggered.

Because these leadership stocks are in so many ETFs and mutual funds, mostly “indexed funds” sold to supposedly passive investors, if they start declining and bringing down their ETFs and mutual funds, passive investors will become active and start selling.

That’s a problem for the parties, known as authorized participants (APs), who manage ETF portfolios in terms of creating and liquidating units.

If sell orders keep rolling in on ETFs, APs must liquidate underlying stocks in the trusts. As heavier selling takes root, APs don’t want to end up with millions of shares of declining stocks they must liquidate into a falling market and end up taking huge hits on their own trading desks.

They’re going to short stocks and futures to stay ahead of ETF sellers. Their shorting will depress stocks, prompting more ETF selling. Hence, the negative feedback loop.

That’s why keying in on the leadership stocks is so important.

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Here’s What to Watch For

For Facebook, $150 is major support. The company’s chief financial officer just hammered the stock because of terrible forward guidance. It’s been holding above $172 but could quickly test $170 and break lower. As a bellwether of social media and advertising spending, we must watch Facebook.

Apple’s been hitting every pitch out of the park and, as of yesterday morning, crossed the $1 trillion market-cap mark. But, that doesn’t mean selling around the horn wouldn’t force some profit-taking in AAPL. There’s support at $190, but more importantly, the $180 level is something of a line in the sand. If Apple breaks below $180 after all the good news coming out of the company, something’s wrong – and it won’t be Apple’s earnings. It will be negative feedback loop selling that infects Apple.

Amazon’s another superheavyweight rock star that keeps belting out platinum earnings numbers, but earnings won’t be enough in a panic selloff. The level to watch for Amazon is $1,600. The stock should see buying there. If it breaks below $1,600, the next strong support is $1,400. But getting there in a hurry would be scary. If AMZN breaks below $1,400, it’s either a great buy or we’re about to fall into the abyss.

Netflix at about $342 is fast approaching its major support, which is the $300 level. While Netflix isn’t as big a company as the others, it’s watched closely because it’s been a stellar performer. Below $300 would make a lot of investors very nervous about what remaining profits they have on the table.

Alphabet, after climbing to a new record high of around $1,285 on better-than-expected earnings, has come right back down to around $1,240. If GOOGL can hold $1,200, that’s a good sign. If it breaks down to $1,175, that’s worrisome. The danger zone for Alphabet and the market is if GOOGL breaks major support at $1,100.

Microsoft’s been an absolute stellar performer, considering it’s no longer considered a growth stock. So much for analysts getting it wrong. I’ve been recommending buying Microsoft all the way up when it broke $28. Now, its support level is $100. If MSFT trades below there, it’s the market that’s weakening – not Mr. Softy’s earnings.

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On the interest rate front, the news is scary. Rates are rising in the United States – at least the Federal Reserve is hiking them. So far, however, the U.S. 10-year Treasury note’s been below 3%, a level that, when breached to the upside in February, spooked investors into a round of panic selling.

Well, we’re back there again. It’s not so much the 3% level anymore; markets have digested that level. The new levels of concern on the 10-year note are 3.1%, then 3.25%. If rates rise slowly to 3.1%, over a few quarters, that’s no big deal.

But, if the 10-year gets to 3.1% in a matter of weeks, that’s worrisome. If the yield spikes to $3.25 while the stock market’s going sideways or meandering lower, it will trigger a bond selloff that will cross-contaminate stocks in a New York second.

Watch how quickly rates rise and get out of the way of falling prices in bonds, which is what happens when rates rise. Do so by taking profits on your stocks.

Finally, “Where would the market be without geopolitics?” you ask. Higher, for sure, I say.

But, geopolitics can’t be swept under the rug – especially not trade wars.

Rising interest rates and/or geopolitical rubber bands snapping will hit markets and all the benchmark indices.

The level to watch on the Dow Jones is 24,000. We need to hold there. But, if we get down to the 23,500 level, that’s going to be scary. Breaking that support could seriously panic investors.

For the S&P 500, major support is at 2,700. Below that, something’s wrong. The last-gasp support for the SPX is 2,550. Below that and it’s anybody’s guess how far down we go from there.

As for the Nasdaq Composite, its major support level is 7,400. If it breaks that support, and the other benchmarks are breaking down, the Nasdaq’s next support level is 7,000. If we test its lows at 6,800 and break them, you had better hope you’re short.

Those are the important levels all major trading desks and institutional investors are watching.

Make sure you have your stops in place if we start approaching first-level support ranges.

If we break them and you’ve got a bad feeling, and you should, load up on your short positions. Because if we get to lower levels and break them, you’ll be laughing all the way to the bank.

And, for more anyone who may be feeling the pressure of the stock market, listen closely.

I get that having to watch all these levels can be stressful and tiring. It’s a lot to worry about. And with how volatile the market’s been, it can make you want to throw in the towel and look for moneymaking opportunities elsewhere.

But, over the course of eight long, grueling years, a team of the best and most brilliant minds in physics, mathematics, and engineering have helped me develop something called the “Master Algorithm.”

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And if you play your cards right every week with this brand new moneymaking method, by taking less than a minute every Monday, you could be sitting on as much as $2,900, $7,200, even $11,000 by that Friday.

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