NASDAQ up 30% this year, time to sell?

This year has been a wild ride for the stock market as the NASDAQ’s unexpectedly defied both inflationary and recessionary fears having risen by 40% since its lows.

This massive run-up could lead many to simply cash out and call it a day however I do think that there are indeed risks associated with being out of the market just as much as there are risks being in the market.

While our individual financial circumstances may vary, it is important for investors to understand the reasons behind the market’s positive performance in order to make a more well-informed decision. By understanding the factors driving Nasdaq’s growth, investors can decide whether or not now is the right time for them to sell their stocks.

In this article, I look at what’s fueling this rally along with how I see it playing out and what I’ve been doing as an investor.

3 Reasons for this Rally

The current rally has been driven by a number of different factors.

To keep things brief, I’ve narrowed down these reasons to just three. They are the “Fed Pause”, concentration of this rally and advancements in AI. By exploring these three causes in detail, we can gain a better understanding of why we are where we are today.

1. The Fed Pause

Markets projecting the Fed’s next move are currently pricing in a 78% chance the Federal Reserve pauses its interest rate hike cycle at its meeting next week.

“The FOMC is likely to pause at its June meeting next week to let the haze clear before it considers another rate hike…”

Stock market news today

The market is currently anticipating that the Federal Reserve will pause its rate hike due to the stress that such hikes have had on America’s financial system.

The smaller U.S. banks, in particular, have most certainly felt the effects of this given the collapse in some of the smaller banks such as SVB.

With inflation expectations controlled and somewhat “fears” of overtightening, the market as a whole now has greater reason to expect more dovish federal reserve actions both in the month of June and for the rest of 2023.

2. A Concentrated Rally

For better or worst, this rally has been largely driven by just a small number of stocks. Strangely enough, these were also the same companies that experienced severe weakness in their share price in 2022.

the largest 250 stocks yielded an average return of 2% year-to-date, while the smallest 250 stocks recorded an average decline of -4% during the same period.

Why this Bull Run might be a Bad Omen

Hence when we look at the tech sector in general, we know that this sector was a little too ahead of itself during the pandemic.

To cope with more realistic growth expectations, these companies trimmed their operating costs to and with other factors combined, by and large, their earnings continued to remain resilient.

3. Advancements in AI

While advancements in AI have yet to show any significant impact on balance sheets, the market is most certainly pricing that in at present with advancements in AI being more of a “reason not to sell” rather than a catalyst to buy.

It is my personal opinion that what’s preventing investors from selling at present is more the idea that AI still has room to run hence this is not an opportune time to sell. That said we are seeing this AI hype push many of the more “neglected” NASDAQ stocks higher such as the following which I’ve observe in recent time,

• Adobe – Increased by about 20% since releasing its new AI Editing feature.
• Google – Increased by about 20% since releasing BARD back in March 2023
• UPST – Increased by almost 50% due to its “artificial intelligence lending platform”

Time to Sell?

No. But doesn’t hurt to take profit.

My personal answer is still a downright no as I still think that this rally does have legs however I’ve taken profit off many of my positions that I had DCA-ed into over the past year.

May 2023 has been an incredibly active trading month for me as I decided to trim the following positions:

• Palantir
• Meta
• Nvidia
• Trade Desk
• Microsoft

Apart from the overextended AI rally, the other influencing factor for me to take some profits off the table was how the technicals of the Nasdaq have once again reached oversold levels.

Looking the chart above, we can infer that whenever the price action of the QQQ reached oversold levels (RSI of 70 and above, indicated in respective Red Circles), investors took profit.

Hence, based on historical evidence, the odds are indeed with me to infer that the same might happen this time round.

The only thing that’s different about the technicals this time round, is that this rally is indeed much more substantiated.

Both the trajectory of the 50-Day and 200-Day moving averages are sloping upwards and that the distance between them is wide (Highlighted Green Area). These are indications of underlying bullishness, hence I wouldn’t expect the move down to be as intense or as drastic as the previous retractions.

Not sure what to do? That’s fine as long as you’re not losing sleep.

Being a writer and active investor myself doesn’t make me a genius. More so during the past week where I was just completely unsure what to do with Palantir. Hence some good advice from fellow writer JP who mentioned that so long as I’m not losing sleep, no drastic action is needed. *Phew*

On a more serious note, when it comes to investing, it’s not always about timing the market. History has proven that time in the market always beats timing the market. That said, we’re all just going to live once in our lives hence it’s not wrong to want to “maximize” these gains.

In my opinion, taking profits off the table when gains are made can go a long way. After all, nothing goes up forever and if you don’t take profits when they are available, chances are you might miss out on them altogether.