S&P 500, Dow Jones Can't Hide Ugly Truth About the Market
The indices have been masking weakness in AI and Big Tech but that facade could be crumbling.
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The warning signs have been out there for a while, and the resolution of the government shutdown triggered some of the year's worst actions. It was a perfect sell-the-news situation, and sell they did.
The resilient indices have been masking growing weakness in AI and Big Tech names for a while. The S&P 500 and DJIA are still within spitting distance of their highs, but leading names like Oracle (ORCL) have been decimated, down more than 35%.
The Magnificent Seven group topped right after the last earnings reports, and it is now breaking below its 50-day simple moving average for the first time since April. It still hasn’t been corrected very deeply, but the loss of the leadership there is significant.
The real pain in this market is in the high-flying growth names. The Innovated IBD 50 ETF (FFTY) was down 6.5% and undercut its lows from last Friday. It has now formed an ugly-looking topping pattern.
The Russell 2000 (IWM) is also under its 50-day simple moving average and at its lowest closing point since early September. All of the hot momentum groups, such as data centers and quantum computing, are deep into bear market territory already, but you’d never know it based on the action of the indices.
This action is a particularly good illustration of how misleading the indices can be. By the time the S&P 500 even tests significant support, a large percentage of stocks will already be deep into corrections and looking washed out.
The question now is whether the bounce buyers show up or will see some downside momentum build. After the ugliness on Thursday, the bears have the benefit of the doubt, but given how hard many stocks have already been hit, some bottom-fishing opportunities may be developing quickly.
While this action is painful if you are holding anything, it holds the promise of some great opportunities once it relents. In this sort of market, even the best stocks are sold, which creates some interesting opportunities down the road.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
