Investopedia is partnering with CMT Association on this newsletter. The contents of this newsletter are for informational and educational purposes only, however, and do not constitute investing advice. The guest authors, which may sell research to investors, and may trade or hold positions in securities mentioned herein do not represent the views of CMT Association or Investopedia. Please consult a financial advisor for investment recommendations and services.
The Weekly Chart Looks Weak
he S&P 500 index (SPX) rose for the second time in as many days this week, giving hope that the frightful spectre of a bear market was all a bad dream in the process of dissipating. While it very well may be so, for now it is worth remembering that the probability of a new bullish trend is a lower probability bet. The reasoning for this can be found in a review of the weekly candle chart for SPX as shown here.
Over the past year the apparent trendline for the upward move (yellow line) has had only two touches. Were a third rendezvous between line and price to occur before earnings season kicks off three weeks from now, it could signal that investors aren’t expecting much from America’s largest corporations.
In fact, if you measure the distance between the most recent high of SPX and the upward trendline during the week after next, what you find is that price has to travel a larger distance to get to a new high than it does to break below the trendline. If you hypothesize that market prices move in randomized ways, then you arrive at the conclusion there is a 61% chance that the trendline will be broken before a new high is printed by SPX.
Growth Sectors Lagging
It’s not hard to find more market data to support this idea. One place to look might be the relative performance of sectors (see chart).
Defensive sectors such as Consumer Staples, Utilities and Healthcare are often thought to outperform the rest of the sectors in the event of a bear market. Stocks in these sectors often have lower beta and pay larger dividends.
Right now only Healthcare shows up among those three sectors as a leader. That it is accompanied by Energy and Financials speaks to the market’s fascination with tariffs, inflation and the Fed’s responsive interest rate policy more than anything else.
Meanwhile the two sectors lagging the index, Technology and Consumer Discretionary, are typical candidates for the sectors that should be leading in a bear market. So the stage is nearly set for prices to fall.
The Nvidia Bellwether
Nvidia (NVDA) share prices had risen 60% at their peak in the last twelve months. The share price has given back half of those gains since the beginning of the year for a number of reasons, not the least of which is the revaluation of the money other corporations are likely to spend on the companies chips as part of their AI implementations.
NVDA has fallen to the number three position in Invesco’s Nasdaq 100 ETF (QQQ) behind Apple (AAPL) and Microsoft (MSFT) for its market cap size. The larger the market cap of a stock, the larger percentage of it is held by the QQQ fund. The Invesco fund has nine percent of its holdings in NVDA shares, and that makes it an influential bellwether leading QQQ around wherever it decides to go as can be seen in the chart below.
Clear as night and day, NVDA shares led the market higher on the way up, and more recently, have led QQQ southward like June led Roy at the end of that movie (you know the one). Even more telling is that in the past few days, while QQQ has pushed to a higher peak, NVDA has not. Can Roy really go on without June?
