Is This a Major Market Top or Just a Hard Shake?
With stocks, particularly growth stocks, getting pounded, let's look at the market internals for answers.
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The indexes were pounded on Friday, with growth stocks leading the carnage. The S&P 500 dropped 1.7%, the QQQ was hit with a decline of 2%, and the Russell 2000 fell 2.9%. However, the real damage can be seen in the growth stock Innovator IBD 50 ETF FFTY, which sunk a whopping 7.3%. This week, the growth stock group had its worst four-day performance since 2022.
Although the indexes were slaughtered, breadth wasn't nearly as bad. There were 3,650 stocks advancing and 5,600 declining, and even more interesting is that there were 190 new 12-month highs to just 90 new 12-month lows. Typically, when the indexes are pounded in this manner, the internals are much weaker. The fact that they held up illustrates that some rotational action was taking place. Many stocks lost ground, but they held up much better than the Magnificent Seven and other growth stocks.
The initial trigger for this action was the weak Walmart WMT earnings report on Thursday. Walmart has been trending steadily higher for a couple of years, and its valuation has been very stretched. All it took was a slight miss and lower guidance to kill the positive momentum.
Once Walmart's valuation was called into question, it spilled over into growth stocks in general. Many technology names that are in the IBD 50 have very elevated P/Es and growth at much slower levels.
Valuation was the key issue, but it had more of an impact because of increased concerns about inflation and slowing retail sales. In addtion, there is still much uncertainty about tariffs, which isn't helping matters either.
Another factor in play on Friday was the expiration of $2.7 trillion in notional options. That helped to enhance the pressure as investors dealt with valuations.
The big question at this point is whether this is a major market top or just a hard shake. The fact that breadth wasn't much worse makes me think that market players are liquidating "expensive" names and looking for entries in less-extended stocks. For example, biotechnology was only down 0.7% compared to the 6% drop in FFTY.
We'll see how this shakes out next week. I continue to think this is primarily rotational action that benefits astute stock pickers, but that doesn't mean it won't be volatile and difficult to trade. I'll be digging for some new names this weekend.
Have a great weekend. I'll see you on Monday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
