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Will NASDAQ’s Weakness Affect General Market? at Trader’s Narrative

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:

bullish percent Nasdaq S&P500 compared Feb 2010

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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4 Responses to “Will NASDAQ’s Weakness Affect General Market?”  

  1. 1 Speculation

    I noticed the “Slow Stoch” indicator is at a bottom and turning up on the $SPX (S&P 500). Indicators are far from perfect, but they have worked well since March. I am wondering if it will keep working.

    The major level I see on the $SPX is 1074 support and there is an upper resistance line that is not as solid as the support.

  2. 2 pennystocks

    I think we bounced on air from the last election. Very oversold bounce, we’ve topped that and are on a steady downtrend. Hopefully we can hold previous support.

  3. 3 bigmovingstock

    This has been one of the most spectacular rallies I have ever witnessed, and as pennystocks pointed out, it came basically out of thin air on massively oversold conditions. It surely wasn’t the fantastic fundamentals pushing things up! Now the question is, what it left to push the market higher at this point? Not much.

  4. 4 Derry Brown

    I strongly agree with you Babak and find that looking for leadership from the technology sector offers great insight into the markets true direction. With the Dow Theory one looks to transportation stocks (rail roads originally) for confirmation and provide leadership for a trend. While this theory still holds true it was established during the industrial age when the rail was one of the most economically sensitive areas of the market. The economy couldn’t be strong unless rail stocks were thriving.

    Today semiconductors are the rail roads of the information age. No expansion can occur without investment in technical infrastructure and all technology requires semiconductors. The Semis have an added challenge because they have to forecast demand and the slightest slowdown causes a build up in inventory that quickly becomes obsolete.

    Right now we are at a critical juncture. If SMH fails to maintain support from its 200 day MA and $24 then it is likely that support will begin to crumble across the market.

    The small caps in IWM are also highly economically sensitive in comparison to SPY. While volume flows is still quite healthy on SPY, volume flows for SMH and IWM are in a firm down trend and indicate that a breach of support is highly likely. I have written more about my take on the current situation here:

    Keep up the good work Babak, I am glad that I found your blog.

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