-- Weekly Market Summary --

Is The Bull Market Over? Tech Unwind Could Spread

By Joe Duarte on July 2, 2017

The selling in technology stocks seems poised to accelerate and the rest of the market could well follow. Indeed, the combination of low liquidity as Wall Street takes off for summer vacations, the Federal Reserve being hell bent on raising interest rates, and the increasing political dysfunction in Washington and the rest of the world could add up and trigger some very serious market events.

Regular readers know I’ve been pragmatically bullish about this market for months, and although I’m not turning rabidly bearish it’s increasingly clear this market is not what it was a few weeks ago. Sure, anyone can see volatility has increased and the technology rally has taken a huge hit. What may not be as apparent to some investors is that there are also some pockets of strength in this market. For example, the banking stocks seem to be trying to take over the market’s leadership role, the housing stocks are attracting moderate amounts of money, the transport stocks recently made a new high, and the oil stocks are groping for a bottom. Fortunately, it is this selective strength in a handful of non-technology sectors that is keeping the market from folding as the technology stocks get hammered.

And while strength in those sectors is encouraging, the problem, as I will describe in the next few lines is the overall loss of momentum registering deep inside the market, just as everyone is about to head to the beach and the politics in Washington and elsewhere seem ready to ramp up to unprecedented and highly unpredictable levels.

Regrettably, and of uttermost importance is that it’s difficult to quantify whether the money flowing into housing, banking, transports and to some degree oil stocks is enough to counter the negative effects of the very aggressive selling in the technology sector.

Trouble in Paradise

The NYSE Advance Decline line continues to ignore the aggressive selling in the technology sector. This is due to moderate money flows into housing, banking, and to some degree energy stocks.

The composite chart of the NYAD, the S & P 500 (SPX), the Nasdaq 100 (NDX) and the S & P 400 Midcap indexes in the three lower panels shows a very divided market where the midcap stocks are holding up better than the large cap (SPX) stocks. Perhaps the most telling and worrisome sign is the now well established short to intermediate down trend in the Nasdaq 100 index, where the big cap tech stocks pull most of the weight.

Aside from pointing out the obvious down trend in tech, this chart raises serious questions about the future of the market – the most important being whether big tech (NDX) drags down the rest of the market or whether there is enough money coming into the midcap sector and the banking, transport, energy, and housing stocks that are housed in the S & P 500.

Stealth Weakness Appears

In order to answer the question raised above, I dug deeper into the market’s technical measurements, specifically the number of stocks in the S & P 500 that are currently in long term up trends as measured by whether they are above and below their 200-day moving average.

Unfortunately this particular chart raises my concern as well since the number of stocks above their 200 day moving average is starting to shrink, a sign that there is a bit more selling in this market that is suggested by the very bullish action in the NYSE AD line. In fact, the last time this measure dropped below its 50-day moving average, as it did on 6-30, the S & P 500 (see lower panel of this chart) was in September of 2016, the last time the market had a meaningful decline.

Is the Bull Market Over?

I don’t know if this bull market is over, and neither does anyone else. But it’s clear that things are changing and that the odds of a rapid and perhaps meaningful decline are rising if the selling in technology overwhelms the positive money flow into other sectors of the market. Of course, this may be yet another false alarm and we could be heading to new highs in the next few weeks. Moreover, as a trader, I can make money when the market rises or falls. My problem is that at this point, it’s difficult to define the dominant trend well enough to make big bets on the long or the short side. As a result, I am troubled by what I see and I am monitoring all my positions very carefully and hedging my portfolio with put options. It’s worth considering this strategy above all others at this time.

 

 

















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