Did the Stock Market's Groundhog See Its Shadow?
The Magnificent 7 are no longer moving as a united block. What does that mean for stocks?
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We may have just had Groundhog Day, but the market doesn’t feel like that. If it were Groundhog Day, we would see all of the Mag 7 rallying on their merry way and everything else sloshing around or heading down. Yet that is not what last week was about.
Sure the overbought condition brought us chop but there is something more that is happening under the hood. The Magnificent Seven no longer move as a united block. They have started to diverge even among themselves.
Even if the exact number is not seven and we can sub in this one for that one, consider that of the original group: Amazon, Apple, Meta, Netflix, Alphabet, NVIDIA, and Microsoft, only four of them are at the highs with the S&P knocking on the door of an all-time high. Sure, on any given day, if NVDA or AAPL rallies, it can take the index up all on its own, but if we were to do an advance/decline line on these seven stocks, we would see a big divergence in place. One that wasn’t there six months ago.
Microsoft made its high last summer. NVDA may have reached the area of its high again early this year, but mostly the high was November, and at that, it was a marginal high vs. the one made last summer.
Apple, oddly enough, the one that folks no longer love, made its high in December. Netflix, Meta, Amazon and Alphabet are still making new highs. Maybe we should call them the Fab Four now.
With that in mind, take a look at the chart of the Nasdaq McClellan Summation Index, where I use volume instead of the advance/decline line. It has rolled over. I believe some of that is much of that speculation in those Nasdaq names (crypto, penny stocks, etc) leaking from the market, but there is something happening under the hood here. Despite the fact that upside volume has been outpacing downside volume for about two months now, this indicator has rolled over anyway.
Sure this might turn out to be nothing and the index will keep on flying as it has for years but when I see there is a divergence among that elite group I am inclined to think correction not continued upside.
I have been noting that early February will bring the intermediate-term indicators back to an overbought condition. I have also noted the options ratios that have been getting rather extreme. None of these indicators on their own leads to a correction, but the extreme put/call ratios will tend to act as an accelerant should we get some downside.
The ten-day moving average of the equity put/call ratio has now joined the others in making a lower low, closing in on the low seen in the summer of 2023 and the one in the spring of 2022.
I don’t have a strong view on the market this coming week, but I do think February will bring us more volatility, not less.
