This Pattern of Nasdaq Weakness Is Hard to Ignore

 | Jan 10, 2017 | 5:00 PM EST
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This commentary originally appeared on Real Money Pro at 3:15 on Jan. 10. Click here to learn about this dynamic market information service for active traders.

Despite the initial disdain for tech stocks displayed by investors in a post-Trump election world, it has been the Nasdaq leading the equity markets higher. In fact, in recent trading sessions broad-based stock indices such as the S&P 500 have showed signs of cracking, but strength in the tech sector eventually enabled the broader market to recover. However, we wonder what the S&P would be doing if it weren't for abnormally bullish trading in Nasdaq stocks. Perhaps we'll soon find out. A seasonal high in the Nasdaq is due today!

According to our friends at MRCI, the March Nasdaq futures contract has habitually traded lower in the second half of January. A trader going short the March Nasdaq futures on Jan. 10 and holding through Jan. 30 would have been profitable roughly 93% of the time throughout the last 15 years, based on stats provided by MRCI. In other words, it has worked on 14 of the previous 15 occasions.

Obviously, past performance may not be indicative of future results, but there is certainly a pattern of weakness here that should be acknowledged.

Source: MRCI

In addition to what appears to be short-term bearish seasonals, the Nasdaq index is also facing significant technical headwinds. We've charted the equity product, PowerShares QQQ ETF (QQQ) , to get a more accurate long-term "picture." Unfortunately, the quarterly expiration of all stock index futures contracts sometimes leaves some guesswork to chartists due to missing, or sparse, historical data.

A quick look at the QQQ revealed a recent pattern of price reversals following swift runs. In essence, the worst buys in the Nasdaq index have occurred at precisely the time they look to be the best momentum trades. We tend to believe that, at least for now, that will continue to be the case.

A Relative Strength Index (RSI) on a daily chart pushing the high 60s and a Williams' %R approaching 100% suggests the rally could soon run out of buyers. Each of these indicators generally depict a trend that is in need of a breather.

Source: QST

Corroborating the premise that the market is "too bullish" and, therefore, traders could be "too long" are both the AAII Sentiment Survey and the Consensus Bullish Sentiment Index, which suggest investor optimism is at an extreme. According to the American Association of Individual Investors, 46% of those polled are bullish and only 25% are bearish (the remaining are neutral). To put this into perspective, the historical average is 38% and 30%, respectively.

Similarly, the Consensus service suggests 74% of participants are bullish. A reading of 75% or higher is considered to be extreme. If you would like a free trial of the Consensus service, you can sign up on our website here.

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