Pay Attention to the Market's 'Riptide Warnings'

Editor's note: It's easy to get swept up in the excitement behind a big trend. But according to Pete Carmasino from our corporate affiliate Chaikin Analytics, that doesn't mean investors should ignore the warning signs. In this piece – which was first published in the March 28 issue of the Chaikin PowerFeed e-letter – he shares how one tool can help you spot red flags before it's too late...

I know from firsthand experience that riptides are powerful...

I surfed a lot in my teens. And once, while surfing in pre-hurricane conditions, I was carried more than 45 blocks along the New Jersey shoreline before I could get out of the water.

What saved me? I didn't fight the tide. I floated on my board along the shoreline and waited it out.

Thankfully, I had learned that skill as a youngster. I was a great swimmer, but no one is stronger than the ocean's current.

Lifeguards have a saying along the lines of "riptides don't drown people, people drown in riptides." The undertow is what causes the most panic. People will exhaust themselves swimming against it.

Overestimating your swimming ability and underestimating the riptide is a recipe for disaster.

The same is true in the markets. What may look like a broadening out of performance can turn into a new trend – a tide – that takes you out to "sea" if you aren't in the right stocks. It's like a riptide warning.

Thankfully, as I'll explain today, we have an investing guide at Chaikin Analytics that helps us avoid the riptides...

You see, our Power Gauge system gathers investment fundamentals into a simple rating. But that's not all it does... It also gives us technical indicators.

And the one I tend to rely on the most is relative strength.

It shows me if a stock or exchange-traded fund ("ETF") is beating the S&P 500 Index. To track the S&P 500, we use the SPDR S&P 500 Fund (SPY).

Here's the most important thing to remember...

If a stock or fund isn't doing well when SPY is also underperforming, there's a big problem. Not only is that stock or fund going down, it's also down more than the broad market.

This leads me to the recent performance of the Invesco QQQ Trust (QQQ). It's an ETF we can use to track the tech-heavy Nasdaq 100 Index.

Now, I'm not saying that alarms are sounding to "get out of the water" with tech. But it's clear the space is making a move lower. Take a look at the chart below...

You can see in the red circle that QQQ's relative strength versus the S&P 500 has turned lower. That's after months of stronger relative strength versus the broad market.

And in the yellow circle, you can see the Power Gauge has been in "neutral" territory on QQQ since late March. That's also after months of a "bullish" rating.

With the help of the Power Gauge system, we're able to see this breather in real time. And importantly, that means we know not to "swim against the riptide" for now.

Good investing,

Pete Carmasino

Editor's note: Chaikin Analytics founder Marc Chaikin believes the market will reach a massive turning point on May 15. Now is the time to prepare... and to position yourself accordingly. Marc recently went on camera to share why this shift could mean multiple chances to double your money – thanks to a strategy that has nothing to do with AI, crypto, or the "Magnificent Seven" tech stocks. Click here to learn the details.

Further Reading

"People often make clouded judgments in down markets or periods of uncertainty," Chris Igou writes. But don't overcomplicate an easy solution. Stick with what you know... and put these two investing tools to work instead... Learn more here.

Fear has reentered the market. And U.S. stocks have fallen too far, too fast as a result. But according to history, and one important measure, the worst is likely over. Folks should expect a recovery in the months ahead... Read more here.