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I know I tend to compare the current market cycle to the 2003 cyclical bull rally but you have to admit, there are a lot of similarities. It was just earlier this week when I showed the similarity between the recent tape and the 2004 doldrums when an important breadth indicator broke down. With your indulgence here is another.
From the March 2009 lows, the technology sector has had one of the strongest relative strengths. In comparison, for example, the banks and the whole financial sector have been flopping around. And among the wider tech sector, the semiconductors index (SOX) has been one of the strongest during this cyclical bull market. But recently it has fallen about 12% off its high from the start of the new year.
Does that mean that the general market is in trouble? I don’t know. But I can not help in making a comparison to the last time that we lost the leadership of the tech sector. For comparison purposes, I looked at the Bullish Percent Index of the S&P 500 and the NASDAQ Composite. Normally, I use the readings from the BPI as contrarian indicators. So for example, when it gets to 80% or higher, then I start to lighten up on longs and consider shorts. For more details, see: How to Time the Market with Bullish Percent Charts. However, within a very strong momentum market like the one we’ve been having, the Bullish Percent index can remain elevated for quite some time. This is what we’ve been seeing for the past few months as the momentum thrust of this cyclical bull rally has pushed almost all medium-term overbought indicators into the red and kept them there.
A comparison of the breadth, as shown by the Bullish Percent index, between the general market and the technology heavy NASDAQ market shows that the latter has weakened considerably. The last time something similar transpired it was March 2004 just before the market went into a funk that lasted for most of the year and resulted in a scratch for the annual numbers:
For a slightly different take on this same concept, take a look at Michael Kahn’s recent article in Barron’s.
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