Is Big Tech Underperformance Bearish for Stocks?

Large cap technology stocks – the notorious US stock market ‘alpha male’ – is trailing behind.

The chart below plots the Nasdaq-100 (represented by the QQQ ETF – right graph) against the S&P 500 and NYSE Composite.

QQQ has been stuck in neutral, while the S&P 500 and NYSE move ahead in second and third gear.

What does this mean for the stock market in general?

We’ve probably been conditioned to believe that large tech underperformance is bad for the broad market. And over the short-term (1-4 weeks), historical performance numbers support this conclusion.

Over the long-term (3-12 months) however, large tech underperformance is actually positive for the overall market. How come?

There are probably several plausible explanations, here is mine:

‘Bullish Ointment’

Since the very beginning of this rally, the Profit Radar Report pointed out the remarkable strength of the post February 11 meltup:

February 17 PRR: “The rally of last Thursday’s low at 1,810 has been very strong. Historically, this kind of ‘escape velocity’ can potentially carry stocks higher for months.”

February 21 PRR: “From February 12 – 17, the S&P 500 gained more than 1.5% a day for three days in a row. Since 1970, this has happened only eight other times. One year later, the S&P 500 traded higher every time, with an average gain of 19.16%.”

March 20, PRR: “Although the S&P 500 is still 3.16% below its November 3, 2015 intraday high at 2,116.48 (and 4% below its all-time high), the NY Composite a/d line already surpassed its November 3, 2015 high. While the S&P retraced only 78.6% of its prior losses, the NYC a/d line already retraced 117.83%. This data suggests that the rally from the February 11, 2016 low is stronger than the rallies from the September 2015 and October 2014 lows.”

A strong rally is like the proverbial tide that lifts all boats. Unlike other rallies in 2014 and 2015, which were more selective, this rally is actually ‘lifting all boats.’

The NYSE Composite Index consists of some 1,900 stocks (large, mid, small-cap stocks). The Nasdaq-100 of only 100 large cap tech stocks.

The fact that the NYSE Composite started to outperform the QQQs shows that liquidity is penetrating all corners of the market. That’s a good long-term sign.

Fly in the Ointment

However, there is a bearish fly in the bullish ointment. The second chart plots the S&P 500 against the percentage of S&P 500 and NYSE stocks above their 50-day SMA.

The percentage of NYSE stocks above their 50-day SMA has been stronger than the percentage of S&P 500 stocks, which confirms the strength of the broader, more diversified NYSE composite.

As of Wednesday’s close, the percentage of NYSE stocks failed to confirm the new S&P 500 (and NYSE Composite) recovery highs (short red line). The percentage of S&P 500 stocks above their 50-day SMA has been lagging since March 30 (longer red line).

All the strong breadth reading throughout this rally confirmed our February 11 buy signal.

Although we anticipated a temporary pullback, the April 3 Profit Radar Report stated that a break below 2,040 is needed as the first step towards confirming further weakness.

Staying above support, combined with the long-term bullish developments registered in recent weeks/months has buoyed the S&P 500 higher (the rally from the February low looks like a micro copy of the 2013 rally).

Unless the bearish divergences mentioned above are erased, the S&P 500 is nearing another inflection zone that may rebuff stocks for a little while.

Continued updates are available via the Profit Radar Report. Barron’s graded iSPYETF (and the Profit Radar Report) a “trader with a good track record.”

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s profile of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, and 24.52% in 2015.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

 

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I Spy … An Intriguing NYSE Composite Chart

Perhaps the most fascinating chart right now is that of the NYSE Composite. It features two developments worth exploring:

  1. Island reversal
  2. Bearish wedge

The NYSE Composite includes all stocks listed on the NYSE, about 1,900. Unlike the S&P 500 (NYSEArca: SPY) or Dow Jones (NYSEArca: DIA), the NYSE Composite actually reached a new all-time high on Thursday.

The new all-time high was short-lived and followed by a massive gap down the next morning.

Island Reversal

This gap lower created an island reversal. Some analysts consider island reversals indicative of a major trend change, but the Technical Analysis book by Edwards and Magee describes it as follows:

“The island pattern is not in itself of major significance, in the sense of denoting a long-term top or bottom, but it does as a rule send prices back for a complete retracement of the minor move which preceded it.”

It’s probably up to debate where the last minor move started, but at Friday’s low the NYSE Composite already touched minor support.

In addition, as Sunday’s Profit Radar Report pointed out, there’s an open chart gap, and the post-2009 bull market has filled every chart gap.

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Open gaps are like unfinished business, and with the gap closed this morning, the NYSE Composite doesn’t ‘have to’ move any higher.

Bearish Wedge

In fact, the NYSE Composite has formed a potentially bearish wedge formation (bold trend lines). It takes a break below the green trend line to activate lower targets, but last weeks island reversal throw-over top may be an early indication of an upcoming correction.

Trade Setup

Last week’s all-time high is important for the short term, and going short against it presents a low-risk trade setup with a favorable risk/reward ratio.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

 

NYSE Composite Chart is Sending Strong Message

Although not nearly as popular as the S&P 500 or Dow Jones, the NYSE Composite sports one of the most transparent technical pictures we’ve seen in quite a while. Here’s a closer look at the strong message of the NYSE Composite.

The NYSE Composite Index is not often discussed, but as one of the broadest U.S. indexes (1,868 components) it offers a unique big picture perspective, especially right now.

First off is a weekly log scale bar chart of the NYSE Composite since its March 2009 low along with some basic support/resistance levels and trend lines.

The second chart zooms in on the more recent price action.

There are a number of noteworthy developments:

There is a possible head-and shoulders top. The red line is the neckline. The projected target is 10,655, which was already reached last week.

The measured HS target at 10,655 also coincides with green trend line support.

Despite the measured HS target having been fulfilled, the August 3 Profit Radar Report predicted another leg down.

The NYSE Composite (NYSEArca: NYC) already exceeded last weeks low and the measured HS down side target. Today it broke below last week’s low and first green trend line support.

What does this mean for the NYSE Composite?

It doesn’t take a ‘chart Sherlock’ to perceive that the next leg down is underway.

While the trend is still down, the outlook is not as bleak as many expect. There is support at 10, 447 (200-day SMA) and 10,250.

From this support I expect a reaction that will surprise Wall Street and investors alike.

More details along with an actual projection for the S&P 500 are available via the Profit Radar Report.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

RSI Dangerously Overbought for S&P 500, Dow Jones and NYSE Composite

As a standalone conventional indicator RSI can give some misleading signals. However, RSI has ventured into an overbought zone rarely attained. There are also other forces at work that suggest paying more than the usual attention.

Parents remember the famous words, “Are we there yet?” Investors are probably wondering, “Are we overbought yet?”

The S&P 500 has gone more than six months without a correction greater than 5%, so the question, “Are stocks overbought” is certainly a valid one.

The weekly bar chart below shows one of the most rudimentary momentum gauges – the Relative Strength Index (RSI).

RSI attempts to gauge the extent of ‘overboughtness’ by comparing the magnitude of recent gains to recent losses.

I prefer not to walk the ‘beaten path’ of technical indicators and use a 35-period RSI instead of the 14-period RSI default. The 35-period RSI spits out some signals that may go overlooked by the investing masses.

Here are the signals:

1) RSI is above 70 and overbought. In fact, RSI is at or near the highest level over the past decade. The dotted purple lines mark periods of similar RSI readings.

2) This week’s RSI high has confirmed this week’s new all-time high. There is no bearish divergence (most prior price highs occurred against a lower RSI reading).

Here are the conclusions:

1) Prices are likely to struggle moving higher or correct.

2) RSI (along with other momentum indicators) confirmed the latest price high, which suggests that any decline is unlikely to mark a major market top.

Here is RSI in context:

Various sentiment indicators have reached the ‘danger zone’ and post-election seasonality is about to turn sour.

The up trend is still intact and coming up with possible price targets or resistance levels is tougher for indexes that are trading at all-time highs. There simply is less overhead resistance.

For that reason, the Profit Radar Report has been recommending long positions in the Nasdaq-100 Index (corresponding ETF: PowerShares QQQ – QQQ).

The Nasdaq-100 has well-defined resistance and support levels. Thursday’s trade briefly poked above long-term trend line resistance and fell back below. This was a sell signal for half of our Nasdaq-100 position.

It is too early to tell if prices are ready for the seasonal summer siesta, but with sentiment heating up, seasonality cooling down and prices falling away from resistance, it’s prudent to take some profits off the table and prepare for the balancing act between milking the bullish potential and minimizing bearish risk.

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