NASDAQ: What Dangers Lurk Beneath The Surface?

NASDAQ: What Dangers Lurk Beneath The Surface?

As of Monday’s close (13 December 2021) The Nasdaq was just 4%shy of it’s all-time high of 16,765, reached three weeks earlier on 22 November.

A stock – or stock market – that is trading at or near all-time highs is bullish. Particularly in December, which has bullish seasonality with the “Santa Claus rally”.

So why am I approaching the current environment with added caution?

There are some problems in the current market that I’d like to draw your attention to.

Market breadth continues to look very weak

Markets that are trading at all-time highs are bullish. The problem with the current situation is that there are only a handful of stocks keeping the indices up there.

The chart below shows the NASDAQ advance-decline line (with a chart of the Nasdaq 100 Index behind).

What this chart highlights is that market breadth peaked all the way back in February 2021…it has been trending lower ever since!

Nasdaq advance decline line

In other words, even as the Nasdaq has continued to make new highs, fewer and fewer stocks have been participating in the rally.

There are other ways we can detect deteriorating breadth

Have a look at the chart below of the technology sector (XLK). It made a new all-time high yesterday (thanks almost entirely to Apple!)

Tech stocks make a new all-time high

But contrast the tech sector with some other important components within the technology sector.

Take a look at software stocks (as represented by the ETF: IGV). They have entered “correction” territory, having fallen -10% from their recent high:

software stocks have entered a correction

Cyber security stocks (represented by HACK) have fallen 12% from their high:

cyber security stocks -12%

The cloud computing industry group (as represented by CLOU) is getting near bear market territory, having fallen -17% from its high:

Cloud computing stocks -17%

And “growth stocks” (using the IBD 50 ETF: FFTY as a barometer) have fallen a similar magnitude:

Growth stocks are in a correction

And even these charts hide the absolute horror story endured by several former high-flying stocks like Roku (ROKU), Snapchat (SNAP), Peloton (PTON), Square (SQ), PayPal (PYPL), Pinterest (PINS), Zoom (ZM), Chewy (CHWY), Teladoc (TDOC), Twilio (TWLO), Citrix (CTXS), Docusign (DOCU) Wayfair (W) and others. Many of these stocks have fallen 50% or more.

It’s almost as if the market is being held up by just three stocks: Apple (AAPL), Microsoft (MSFT) and Alphabet (GOOGL). If those three stocks roll over, it’s going to be no bueno for the indices.

Now, this is way more subjective…

…but I don’t love the level the Nasdaq looks to have (so far) failed at:

Nasdaq head and shoulders ?

These “head & shoulders top” type setups almost never work out, but I am keeping an eye on this one in the context of all that I have discussed above.

And the S&P 500’s inability to make any progress above 4700 is causing the chart pattern to look an awful lot like a triple-top…

S&P 500 triple top

In conclusion

Despite strong trends in the S&P and the Nasdaq, bullish seasonality and Santa Claus just around the corner, I see good reasons to be cautious here. My exposure right now is very light and hedged.

I realize that putting out a note like this the day before FOMC is risky. If the Fed says what they can to appease the markets tomorrow, Christmas may come early for stocks. But even if we do get a December rally, a LOT of work needs to be done to address the breadth concerns, so I think they are worth highlighting.

Good trading!

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