Buy long-term growth plays amid sell-off: Technical analyst

Equity markets (^DJI, ^IXIC, ^GSPC) are experiencing a sharp decline on Monday as investors' recession fears intensify. The CBOE volatility index (^VIX) has surged to a 4-year high. Oppenheimer & Co. Inc. managing director and head of technical analysis Ari Wald joins Catalysts to discuss market outlooks on this broadening market sell-off.

Wald characterizes the current market sell-off as "a pullback in an uptrend." He notes that the VIX's current level of 65 was "only exceeded during the depths of the Great Financial Crisis and the COVID lows," suggesting a market low could be on the horizon.

For this downturn, Wald recommends plays with "long-term relative strength," favoring the Nasdaq 100 (^NDX) for long-term investors. He advises against small-cap stocks (^RUT): "As we think about the possibility of market breadth, small caps are likely going to be the first to peak."

Regarding a potential Federal Reserve interest rate cut, Wald believes it will likely be a "reactionary cut" at this point, though he anticipates positive market momentum following such a move.

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Angel Smith

Video transcript

Well, the S and P 500 down just about 2.5%.

So off its earlier lows of the session, you've got the index had a major run up so far this year ahead of that volatility that we've seen given.

Even with today's drop, it's still up about 9% even with the recent pullback.

But our next guest seeing some year risk potentially here for the S and P 500 here to talk about that and the key levels that he is seeing, I want to bring in our next guest.

We have Ari Wald.

He's the head of technical analysis at Oppenheimer Ari.

It's great to see you.

So on a day like today, I gotta ask you what levels are you closely watching?

Given the, the dramatic sell off answer that one is, is 5100.

That's uh just a retracement of prior rise.

You have the 200 day average uh around that as well.

So gonna be looking for signs of stabilization there.

But you know, really for us, it's taking a step back and seeing the, the market down about 9 to 10% you know, off its peak, uh still above those long term moving averages as well.

So this would still, you know, qualify as a pullback in an uptrend.

Um, you know, with that said on top of that, you had a V reading this morning of 65 amazing if you look back at the last 35 years, that was only exceeded during the depths of the great financial crisis and the COVID lows.

Uh and, and again, that's with the market only down 10% off its peak.

So that would suggest that a market low is likely to be, is likely to develop over the next week or two if if not the coming days.

So right off the bat, it's, it's, we think it's too late to sell.

We are looking to uh buy, you know, those positions that we see as core positions that, that we think we can own through what should be some additional market volatility.

But I I think there are some potential underlying warnings that would suggest that we're later in this full cycle than we originally thought.

All right, talk to me a little bit more about where you are seeing the opportunity to the extent that you can and kind of how you're identifying those areas that are more attractive, just given all the uncertainty that still remains.

Uh Sure.

So yeah, we would fall back to kind of our discipline uh momentum investing where we're seeing long term relative strength, that's gonna be us over world uh large, over small growth over value.

Uh So we still still believe that we are in a tech led and a growth led secular bull market.

Uh Obviously, there's going to be ebbs and flows around that.

But I think as you see these big spikes in the vics and, and markets down sharply, I think a great opportunity to, to buy the NASDAQ 100 for the long term.

Um We, and then conversely, we would be, you know, less sure about uh small caps here, which had a great July.

Uh But as we think about the possibility of peak market bread, um small caps likely are going to be the first to peak, you know, they usually peak ahead of large caps.

And that's kind of been in conjunction with some of our thinking.

One of our established viewpoints has been that the market should top by the time you get closer to that.

Uh First fed cut, we look back historically and both cycles that develop against tighter monetary policy usually top uh when the fed starts to cut its policy rate.

And that's especially true when they are reactionary cuts which appears to be developing there.

So again, tops are a process, they, they take time, it would suggest, you know, meaningful more upside versus the high point that we saw in July might be capped there.

But um I think there is a rally here in the ensuing process.

So, Ari then do you think that this, if we were to get a fed cut here in September, regardless of, if it's 25 if it's 50 it's still going to be a sell the news type of event.

It sounds like, uh, generally, uh, longer term.

I mean, listen, I can see a scenario where the fed cuts, the market rallies just given how much the, the rubber band has been snapped and there's gonna be this feel good story attached to it.

Uh And, and I think some, I think some the case could be made that as a market positive.

But you know, our kind of thinking that would be part of a more of a topping process just given it, it seems to be a more of a reactionary cut.

And we've, we've, we've looked at the numbers, if you look at specifically points through market history, when the yield curve is inverted and the last policy move by the fed was a cut.

You, you're typically in your worst bucket, you typically you'll see negative returns over a four or 12 month basis there.

Um So, uh again, it's, it's not an imminent sell signal, but I think it does speak to this more later cycle and later in bull market that we're in a real quick before I let you go.

How should investors overall just be looking at the selling pressure that we've seen starting Friday and then into today is this almost healthy to an extent here for the market at this point in the cycle on the surface, it is, if you look at the indexes, they're all coming back into their 200 day averages.

Uh and there's really no meaningful signs of distribution or at least it's, it's just emerging.

The, the concerns really lie in the rate market and what we are, we're seeing some subtle shifts in leadership.

You know what I think, what is in terms of what has changed over the last week is you had a significant breakdown in interest rates and we've always said, be careful what you wish for.

By the time you get lower rates, it's going to be the market pricing in more imminent recession.

Uh And you seen, we've seen the leadership of the market change as well looking at the high beta versus low volatility ratio, which is pretty much uh offense versus defense.

Uh We have seen a shift towards defensive dos which we haven't seen throughout this cycle.

So, you know, the first kind of pillars of strength are starting to crack here.

Um And those are the warnings to be mindful of as we look ahead.

All right, Ari Wald, great to have you here.

Oppenheimer's head of technical analysis.

Thanks so much.

Thank you.