Managing Editor’s Note: Today, we’re hearing from our contributing editor Mike Burnick in his weekly Thursday feature.
Mike has over 30 years in the investment and financial services industry – from operating as a stockbroker, trader, and research analyst, to running a mutual fund as a registered investment advisor and portfolio manager, to being Research Director for the Sovereign Society, specializing in global ETF and options investing.
And he’s been senior analyst at TradeSmith for three years, running Constant Cash Flow, Infinite Income Loop, and Inside TradeSmith.
Here’s Mike…
Trouble Ahead: Nasdaq, Technology and Two More Sectors Turn Red
BY MIKE BURNICK, CONTRIBUTING EDITOR, MARKET MINUTE
Some cracks are beginning to appear in the foundations of the stock market, according to our TradeSmith Market Outlook indicators.
And that’s a warning flag of even more potential trouble ahead.
The tech-heavy Nasdaq 100 Index just slipped into our short-term Health Indicator Red Zone.
You can view this valuable data, as highlighted above, by clicking on the Markets tab from the main menu bar of TradeSmith Finance, then clicking on Market Outlook (list view).
The Short-Term Health Indicator tells you where any asset, stock or index stands relative to TradeSmith’s proprietary algorithm, which measures changes in volatility and the strength of trend.
When a signal flashes, red or green, it’s designed to alert you to a trend change that could persist for a few months on average. Red zone = down trend, and green = up.
This is a big reversal of fortune for Nasdaq. From the stock market’s leading index (home of the Mag 7 stocks) in recent years.
Nasdaq is now lagging badly, down almost 6% from last year’s highs.
The good news, as you can also see above, is the Dow 30 remain in the short-term Health green zone.
So far, the epicenter of the selling has been mainly in technology stocks, which make up a very big part of Nasdaq. It hasn’t spilled over yet to the broader stock market indexes.
However, selling is starting to spread to other sectors outside of tech. Three of the 11 S&P 500 sectors recently dropped into our short-term Health indicator Red Zone as well.
As you can see above, Consumer Cyclicals slipped into the Health indicator red zone two weeks ago. Financial Services followed last week.
And this week the once mighty Technology sector fell from grace, also entering the red zone. Plus, Communication Services entered the yellow zone (think caution), so it could be vulnerable to going red too.
Subscribers can quickly view this data by also clicking on the Markets tab and then on S&P Sectors from the sub-menu bar, shown above.
Notice that the Tech sector has far more component stocks in the Health Red Zone (55.71%) than stocks in the green zone (37.14%). This tells us the majority of tech stocks are under selling pressure.
You can view this data for any sector (or index) by simply hovering over the green, yellow, red bars to the right of each sector.
Bottom Line: Three of 11 sectors in the red zone may not seem all that negative. After all, seven other sectors remain in the green zone (with one yellow). The problem is that Financial, Consumer and especially Technology sectors combined account for over 50% of the S&P 500 by weight. That means unless these sectors can soon stabilize, and better yet rebound, they are large enough to potentially drag down the rest of the market.
Good investing,
Mike Burnick
Contributing Editor, Market Minute