Is A Nascent Trend Forming?

By: Kent Engelke | Capitol Securities

Is a nascent trend forming? Three out of the last five days the largest capitalized momentum issues, which are technology shares, sold off as compared to the rest of the market. Yes, the S & P 500 technology index–dominated by four stocks–is still up a whopping 18% YTD, but it has dropped about 4% in five days.

According to Bloomberg, the NASDAQ 100, which is also dominated by the mega sized technology issues, is on the verge of breaking its fifty day moving average. It has remained above this key threshold for 131 consecutive days, the longest stretch since 1995.

In September 1995, when a 166 day run above this key level came to stop, the NASDAQ was flat for the ensuing one and three months. The only comparable run occurred in 1986. The index dropped 13% in one month and 16% three months later when this stretch of bullish ended in July 1986

The hapless Russell 2000, which was posting a 2% YTD gain last week, is essentially unchanged from that period. Individual issues however are advancing.

Yesterday, I referenced a JP Morgan report stating that 90% of investing decisions do not rely upon any fundamental analysis. Decisions are made via algorithms and size, essentially stating past performance will be indicative of future performance.

Will today be uglier than 1986, the result of total domination of the averages by a few stocks and the virtual sole reliance upon moving average lines for investment decisions?

Conversely, will everything else advance at the expense of the five mega-sized tech issues that have dominated the markets for several years, the inverse of past performance?

Three days out of five days do not make a trend but…

Oh, for what it is worth department, in the largest six-month performance difference since December 2010, it has underperformed the S & P 500 growth by almost 1,400 basis points as per Bloomberg.

What will happen today?

Last night the foreign markets were up. London was up 0.62%, Paris was up 0.71% and Frankfurt was up 0.27%. China was down 0.30%, Japan was up 0.56% and Hang Sang was up 0.24%.

The Dow should open flat. The 10-year is unchanged at 2.17%.