What Many Blue Chips Are Signaling

stock marketThe NASDAQ Composite Index is the key to this stock market; it has been the leader of the other major indices this year. While slowing trading action in Apple Inc. (NASDAQ/AAPL) and some other leading stocks is worrisome, a lot of blue chip companies are trading right at their 52-week highs; some are even hitting new all-time highs on the stock market.

But before this summer’s stock market rally (which to me was one of the most unique, low-volume rallies I’ve ever seen), a lot of blue chips began to top out. In my mind, this was the first sign that the broader stock market was beginning its process of hitting its top.

Blue chips such as Cummins Inc. (NYSE/CMI), McDonalds Corporation (NYSE/MCD), United Technologies Corporation (NYSE/UTX), Caterpillar Inc. (NYSE/CAT), and E.I. du Pont de Nemours and Company (NYSE/DD) all basically topped out before the low-volume, summer rally began, driven by anticipation for a third round of quantitative easing (QE3). To me, the trading action in these blue chips is telling—this is a stock market that is on borrowed time. Take a look at the stock charts of Caterpillar and McDonalds below:

Caterpillar Inc. Chart

Chart courtesy of www.StockCharts.com

McDonalds Corporation Chart

Chart courtesy of www.StockCharts.com

A lot of these blue chips I have mentioned were like canaries in the coal mine, warning on slowing international operations. In fact, most of these blue chips cited slowing business conditions in China way before FedEx Corporation (NYSE/FDX) or NIKE, Inc. (NYSE/NKE). NIKE was another blue chip winner that more than doubled since the stock market’s low set in March 2009. The stock’s share price hit an all-time record high of $114.81 in May of this year. Currently trading around $95.00 a share, NIKE’s position has broken down significantly.

This could all be just normal price consolidation among the many blue chips that have done incredibly well over the last decade, while the main stock market averages have been treading water. The S&P 500 Index has only crept back up to where it was trading 12 years ago. By way of comparison, shares in Caterpillar have more than quintupled in price over the last 12 years.

As much as I want to believe this, however, my gut still tells me the broader stock market is in trouble; whether we get a major correction or a long period of consolidation, the chances of this summer’s mini-rally continuing are slim. I’m not running for the exit, but I’m not buying either.