Well we rallied. Then we gave it back, similar to Wednesday, but not similar to Wednesday, we regained some of it and closed in the green. Will we see the same pattern again on Friday?
I would love to report to you that the indicators changed, but they didn't. The Russell 2000 did make a lower low and there were fewer new lows on the New York Stock Exchange and on Nasdaq, so we have a small positive divergence.
But let's talk about the tech rally. I have noted for two weeks now that it's something that bothers me about the market. That narrowness with all the buying going into tech. The QQQ (QQQ) are up 7% since we got oversold just over a week ago and in that same time the Russell has gone nowhere.
I look at all sorts of breadth measures. One I prefer for Nasdaq is cumulative volume. I find it more useful for Nasdaq than the advance/decline line. Typically, this breadth measure keeps pace with Nasdaq, even in 2021 when the rally got narrower and narrower as the year pushed on, cumulative volume kept pace with the move in Nasdaq.
Now take a look at the chart and notice that when the market tumbled in the fall of last year Nasdaq made a series of lower lows (brown) while this breadth indicator made higher lows. It started with a higher low in September vs. May/June and in December it made a higher low vs. the lower low in Nasdaq.
Now we come to the present and Nasdaq has rallied approximately 7% while this metric has done absolutely nothing. That is a divergence.
I find this is interesting, because as you can see since that oversold reading a week ago the volume in the QQQs has surged with a few days clocking in at 100 million shares (not common for rallies; common in declines-see May).
So this rally is even different than 2021 in its high level of concentration and its flocking to a narrow group of stocks. I have no indicator that says so, but I can imagine that this trend could easily continue into the end of the quarter as professional managers wait to close their books on the quarter.
Then I consider the selling that has taken place in the industrials as everyone is now preparing for a recession. The transports have collapsed, so they too are prepping for a recession. And the airlines went from darlings to shunned. Yet somehow folks think the semiconductors will be awesome. Maybe they will be.
But I looked back at 2000, because this move they have made since that oversold reading a week ago relative to the Nasdaq has been something to behold. Here you might be as surprised as I was to discover that the blue arrow on the chart is the mid-March 2000 high in Nasdaq. Look at the outperformance of the semis for the next six months. And even at that they didn't really break to the downside until 2002.
I hate when we have a market like this; I much prefer what we saw in the fall. This is the market we have. I believe it is unsustainable but the question is figuring out how long it lasts. I will be watching for a turn in that ratio of the SOX to Nasdaq.
