- Investors should brace for a modest drawdown in the coming weeks, David Keller warns.
- The chief market strategist at StockCharts.com sees an ominous pattern in the S&P 500.
- Here are six stocks or sectors that investors should tilt toward right now.
For the past month, US stocks have been essentially flat, and many investors would simply shrug if asked whether the next major market move will be higher or lower.
According to veteran chartmaster David Keller, the market is also shrugging. That means traders should go on the defensive and brace themselves for more losses in October.
The S&P 500 has formed a bearish head-and-shoulders pattern, according to Keller in a recent interview with Insider. This pattern consists of a large peak sandwiched between two smaller crests, and the chief market strategist at StockCharts.com believes it foreshadows more short-term pain.
“We have a clear peak, we’ve got the lower high in June, the lower high around Labor Day,” Keller explained. “A break below 4,350 would trigger a fairly strong sell signal, with a downside target of around 4,100 or so.” And I believe that is how things will play out.”
Keller has been cautious for months, according to those who have followed his calls. His early August prediction that stocks would fall was correct, though the S&P 500 did not lose as much of its summer rally as the chart guru predicted. His pullback calls in June and April were unsuccessful, as stocks defied gravity for months, though Keller never predicted a crash.
Despite the fact that the late-summer drawdown was smaller than expected, Keller is concerned about weaker market breadth. Only 30% to 35% of S&P 500 companies are trading above their 50-day moving average, he noted, indicating a less-than-healthy market.
“The breadth conditions have certainly gone from very bullish in June and July, to questionable in August, and now, I would argue, more bearish here in September,” Keller explained.
Despite all the talk about the “magnificent seven” stocks leading the market, Keller believes the term ignores material differences in the fundamentals of mega-cap tech firms. Some growth leaders, he believes, are worth investing in now, while others should be avoided.
Six investments to consider right now
Three of the six best market opportunities that Keller currently sees are tech behemoths that will have crushed the market in 2023: Nvidia (NVDA), Alphabet (GOOGL), and Amazon (AMZN).
Titan of artificial intelligence Despite recent weakness, Nvidia remains the year’s top stock, and Keller believes it’s safe to buy the dip unless shares fall below their 50-day moving average. He warned that a close below $400 could spell trouble, despite the fact that the stock is still trading well above that level.
Google parent Alphabet has recently dominated and is near all-time highs, according to Keller, and he believes it still has strong technical momentum. While Amazon has fallen in price in the last week, Keller believes it is now at an attractive entry point. At the very least, he stated that it isn’t worth selling.
“An important tenet of trend-following and technical analysis, as you and I tend to discuss, is that when a trend is working, you stick with it,” Keller explained. “And one of the worst things you could ever do is sell a stock up 20% and then leave the next 200% on the table.”
“And so the argument is, stick with the winners,” Keller continued. Something similar to Alphabet — not broken. Something similar to Amazon — not necessarily broken just yet. So I think sticking with the names that are working makes a lot of sense here.”
Other tech titans, according to Keller, may have more near-term downside but could still be good long-term opportunities to accumulate excellent companies at significant discounts.
Keller favors stocks in the utilities and energy sectors, particularly those in the oilfield services industry, aside from technology.
According to Keller, the recent recovery of utilities, a defensive stalwart, is another sign that more market downside is likely. He’s content to ride that wave, given his market outlook. While Keller made no specific investment recommendations in this sector, investors can participate in it through the Utilities Select Sector SPDR Fund (XLU) or the Invesco S&P 500 Equal Weight Utilities ETF (RYU).
Energy has also been on a roll recently, with oil prices rising, and Keller advised investors to stick with the trend, which he recommended last month. A popular way to gain exposure to the sector is through the Energy Select Sector SPDR Fund (XLE). The VanEck Oil Services ETF (OIH) is a good way to play the recent surge in oilfield services firms, according to Keller.