Bear Market in Tech Momentum Stocks Raises Red Flags
At this juncture, as we move into the final five weeks of the year, the state of the stock market looks fragile.
At the start of the year, I was optimistically forecasting gains of 10% or more for the stock market, but with the change in the macro environment—namely the China risk and rising yields—my hope now is for the stock market to end the year in the black.
Never mind a 10% gain; a break-even outcome is welcomed at this point.
I’m not shifting my stock market bias to bearish yet, but the deterioration in the technical picture may inevitably force my hand.
Just like September and October, the month of November has extended the stock market losses—specifically toward the higher-beat technology and small-cap segments.
The Nasdaq was down 4.57% on November 21, with many of the top technology momentum stocks, which provided staggering gains in 2017, cratering in bear-market territory. The Nasdaq is not in a bear market yet, but is on the perimeter.
Just take a look at the FAANG stocks relative to their highs:
- Facebook, Inc. (NASDAQ:FB) -38%
- Apple Inc. (NASDAQ:AAPL) -24%
- Amazon.com, Inc. (NASDAQ:AMZN) -26%
- Netflix, Inc. (NASDAQ:NFLX) -38%
- Alphabet Inc (NASDAQ:GOOG) -18.5%
Now, the world isn’t falling apart but the selling should make you pause and think.
The reality is that without market leadership—especially from the technology sector—the upside looks somewhat wonky.
Add in the breakdown in oil prices and the ongoing drama with China playing out on the world stage, and there are reasons to be concerned.
The stock market is anxiously waiting for the meeting between President Donald Trump and President Xi Jinping at the G20 on November 30.
I don’t have a crystal ball, so who knows what will materialize. All I know are the mixed messages from the White House, with the globalists battling the China hawks.
The group that manages to get Trump’s ear will likely determine whether the trade war escalates with tariffs on the remaining $267.0 billion of Chinese imports.
A look at the charts points to a breakdown, with the Nasdaq, Dow, S&P 500, and Russell 2000 languishing below their respective 50-day and 200-day moving averages. The Nasdaq and Russell 2000 are also in correction territory.
The Nasdaq may be set to show a bearish death cross.
Chart courtesy of StockCharts.com
The Russell 2000 is even worse off with a death cross in place—a bearish chart pattern that suggests potentially additional downside moves. Also note the potential of a bullish double bottom forming.
Chart courtesy of StockCharts.com
As far as the S&P 500, a whopping 82% of the stocks are below their 20-day moving average. The table highlights the stock market carnage.
|Technical Indicator||% of S&P 500 Stocks Trading Below|
Market sentiment continues to be weak, with a return to bearish territory after a string of neutral readings.
On the Nasdaq for instance, there were 18 consecutive bearish sentiment days from October 5 to October 30, and eight straight bearish sentiment days to November 21.
There needs to be a strengthening of sentiment in order for the stock market to rise and hold gains.
If you are like me, you will be anxiously waiting to see if Trump and Xi can renew their bromance. Otherwise, we could see a nastier separation.
Trump may want a truce of some sort to not only drive a stock market rally, which he closely monitors and associates with whether a country is strong, but also because he doesn’t want a meltdown that could impact his chances to become a second-term president.