Technically Speaking: FOMO Overrides FOLM

Also, we continue to be concerned about the lack of overall “breadth” of the rally, which was also noted by Jim Bianco, on Monday.

“The next chart shows the impact the so-called FAANMG stocks — Facebook Inc., Apple Inc., Amazon, Netflix Inc., Microsoft Corp., and Google parent Alphabet Inc. — have had on the S&P 500 Index since November 2017. These six stocks alone pushed the S&P 500 up 2.66 percent. The other 494 stocks were collectively down 0.40 percent. Overall, the S&P 500 was up 2.26 percent.”

 

We have seen this in our own data. Each week in the newsletter, I provide the relative performance of various sectors in our portfolio model to the S&P 500 index. When sectors are above trending positively, and the short-term moving average is above the long-term moving average, the sectors are on “buy” signals.  When the majority of sectors are on “buy signals” and the market is rising, it suggests the overall “breadth” of the rally is strong and the market should be bought. 

This is what the relative performance of the model was one year ago at the beginning of July 2017.

Here is what it looks like today.

The deterioration in sector performance is indicative of a late stage market cycle, rising risks, and declines in risk/reward backdrop.

Combine the weakening performance backdrop with a market back to overbought conditions, following an abbreviated rally, and you can understand why we remain more cautionary on the intermediate-term outlook. 

As Helene Meisler noted Monday:

“Friday’s breadth continued the strength we’ve been seeing. This makes it six consecutive green days for breadth.

Since prior to this string of positive breadth readings we had seen breadth alternate positive and negative every other day for two weeks, it’s not going to be easy to pinpoint the day we get overbought. However, I can note that we will be maximum overbought Friday, July 13.”

 

 

 

“Last week we used the Nasdaq Momentum Indicator to pinpoint Tuesday as the day we got oversold. If I use this same method to find the overbought time frame it’s far too wide to be of use. For example, it shows an overbought reading sometime between this Tuesday and next Tuesday.

Then if we use the “what if” for the McClellan Summation Index we discover that it will currently take a net differential of -1,900 (advancers minus decliners) to turn the Summation Index from up to down. In 2017 this indicator was of no help but in 2018 once this gets to the point it needs -2,000 we have been overbought. It’s hard to pinpoint the day using this method but it’s likely that if the market’s breadth is strong on Monday this will go down under -2,000.”

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