It’s time to exercise caution: 2 reasons stocks could pull back

After an historic start to the year, the market looks due for a breather. [Justin Spittler's Trade of the Week] It's time to exercise caution: 2 reasons stocks could pull back There are times to be aggressive. And there are times to exercise caution. Now is the latter. That might surprise you. After all, stocks have been on a tear all year. They’ve rallied in the face of high interest rates, inflation concerns, uncertainty over what the Fed may or may not do, and recession fears. This is classic risk-on behavior. But stocks don’t go up forever, even in bull markets. After an historic start to the year, the market looks due for a breather… at least at the index level. Let me explain… The first chart you need to be aware of is the Tech Sector Fund (XLK). XLK broke out to new all-time highs a few weeks ago. That was a bullish development. But there was just one problem… XLK couldn’t stick the landing. It had a “false breakout,” which often leads to fast moves in the opposite direction. Source: StockCharts If tech sells off here, it would be a problem for the indices. That’s because tech makes up 29% of the S&P 500… and 50% of the Nasdaq. I’m also concerned about interest rates rising rapidly again. The chart of the 10-Year US Treasury yield below says it all... For most of 2022, the 10-Year yield climbed. Stocks didn’t like that one bit. In fact, it wasn’t until interest rates topped out last October that stocks bottomed. Since then, rates have more or less traded sideways. Stocks got used to higher interest rates, so they started rising again. The problem is that rates are inching higher once more. If they break out of the base they’ve been forming since late last year, stocks could sell off hard. Source: StockCharts Of course, this doesn't mean all stocks will decline. After all, there’s always a bull market somewhere. But traders need to choose their spots wisely. Personally, I like playing the rotation out of red-hot sectors like technology into other sectors as a catch-up play. Specifically, I like energy stocks. In my premier advisory, RiskHedge Live, we’ve added four energy trades to our portfolio in recent months, including the Energy Select Sector SPDR Fund (XLE). Justin Spittler Chief Trader, RiskHedge If someone forwarded you this email and you would like to be added to our email list to receive Justin Spittler's Trade of the Week every week, [simply sign up here.]( This email was sent to {EMAIL} as part of your subscription to Justin Spittler's Trade of the Week. To opt-out, please visit the [unsubscribe page](. [READ IMPORTANT DISCLOSURES HERE.]( YOUR USE OF THESE MATERIALS IS SUBJECT TO THE TERMS OF THESE DISCLOSURES. Copyright 2023 RiskHedge. All Rights Reserved RiskHedge | 1417 Sadler Road, PMB 415 | Fernandina Beach, FL 32034