Have you ever noticed that folks tend to be more bullish on the overall market when growth/tech rallies? The best evidence I have is that tech rallied late last week and my weekend Twitter Poll showed the highest percentage (63%) looking for the next 100 points in the S&P 500 to be up since just before Christmas.
So let's talk about Nasdaq, where so many of the tech stocks live. They have been terrible, not just this year, but for the last 18 months. We all know the Nasdaq index topped out in November while the S&P hung on until January. We also know that the number of stocks making new lows on Nasdaq peaked at just shy of 1,800 in late January. Since then, we have seen contracting new lows for Nasdaq.
When I look at the market indicators, I look for a few things. First, are we at an extreme? Secondly, and more importantly, have we seen divergences? Last week we looked at the (negative) divergences that took place in 2021 with new highs for Nasdaq and the (positive) divergences with new lows for Nasdaq in 2022.
Take a look at the 30-day moving average of Nasdaq's advance/decline line. The June swoon found this indicator at a higher low. That's a positive divergence. This is a momentum indicator so what it tells us is that the last trip down for Nasdaq didn't have the same oomph (momentum) as the previous trip down in May.
But look at where the indicator is now: over the zero line for the first time since November. That is a change in character, isn't it?
Now take a look at the McClellan Summation Index for Nasdaq, where I prefer to use volume instead of the advance/decline line. As a reminder we looked at the NYSE Summation Index last week and the potential for a higher low there (so far it is doing just that). Now we look at Nasdaq and see that this indicator has made a higher low in June. I'm not convinced it can make a higher high (over the early April high) but here is another indicator, using different inputs that also says the June decline for Nasdaq didn't have the same oomph on the downside that we have had in all the previous declines.
Finally, we began the year with my fussing over the ratio of the S&P to Nasdaq. It was right at that blue arrow when I noted this ratio, which had been making higher lows for nearly a year, was on the verge of making a higher high or breaking out some might say. The thought is folks were moving to less risky stocks.
For the most part that trend has been in place all year. Yet now I see this peaked (for now) in May and June had a lower high. If you squint really hard you can see that it is trying to make a (minor) lower low then early June now.
Could this recent rally turn out to be similar to April's high? Sure. But we need to keep in mind that at some point the market needs to convert the skeptics and what's the best way to do that? Rally growth/tech stocks.
The market will be back to an overbought reading late this week/early next week. If we can keep this rally going, I suspect we'll see a marked change in sentiment by then.