To close out the week we saw many of the major leading names get
pounded along with any other tech stock you can think of. The NASDAQ Composite
declined -1.8%, while the QQQ and XLK ETF’s dropped -2.5%.
What is astonishing despite this carnage is that the SP500
finished the day unchanged and the Dow Jones was up nearly ½ a percent!
Normally if the market was set for a broad correction, when the leading index
completely falls out of bed the other Indices follow suit and decline even
more.
However, Friday was a day marked by textbook market
rotation. Hardly any other sectors were phased by the slaughter that went on in
Technology. In fact, Financials, Industrials, Health Care, and Materials all
rallied fairly substantially.
We've been waiting for the extended Tech sector to cool-off and it seems that time may have arrived. This doesn’t mean sell
everything indiscriminately, but it is prudent to reduce exposure to
the prior large winning positions we have held for some time now.
I
want to discuss what it means to watch price behavior for adverse “changes” to
a prevailing trend. When a trend has been tremendously strong (at least on an
intermediate basis) it pays to stick with that trend through normal
retracements as long as the behavior of the price action is within a “normal”
character. Let’s look at the Financials (Regional Banks-KRE) for a recent
example of what this means.
In November price made what appeared to be a major bullish shift
in momentum by breaking out of a multi-month range. We then saw a sharp rally
for 6-weeks which consolidated orderly with no real shocks to the prevailing
trend. Consolidations after rallies can have little shakeout attempts (as seen
in the middle of January) but follow-through is important to watch for in the
following week or two. Price held the initial dip and then resumed normally to
new highs.
It wasn’t until the gap higher rally that then saw a
shocking reversal the following day that participants began to be alerted to a
potential change in character. It is one thing for a consolidation to provide a
one day shakeout, it is another to see a very bullish indication (gap higher
from a consolidation) immediately sold and reversed so strongly, which occurred
on March 2nd.
The ensuing action the next week or two provided zero sign
of recovery, price continued to drift lower and all rally attempts were faded
quickly. This is the follow-through confirmation we look for.
Clearly something had changed in the behavior after the
Outside reversal from new highs, shares were then being distributed on any
strength rather than accumulated in an orderly consolidation.
Seeing no relief during this time the bottom finally gave
way mid-March with a selling day that has defined the market action since.
There was a bit of a pop at the end of March but for all intents and purposes,
price has been contained in a volatile sideways trend bounded by the March 21st
range since.
Turning to the Tech sector, it is possible we may be seeing
that initial shock to the prevailing, extended trend.
The
Nasdaq 100 (QQQ) has been red-hot since the January breakout
It should be noted there have been two one-day shakeout
attempts since the January breakout began, one in mid-March and another
mid-May. Note that neither saw a single day’s worth of follow-through.
One key item that seems different to me with Friday’s
reversal is the sheer width of intraday trading range. While the other two
attempts to break trend were relatively wide, Friday’s range was roughly double
those prior days.
Obviously the most important factor will be watching how
price now reacts over the next couple weeks. If there is no problem and this
too was just another shakeout attempt, we should see price stabilize quickly
and recover. What Tech bulls don’t want to see however would be action similar
to the Financials in mid-March; they don’t want to see Friday’s low taken out
on a closing basis and certainly don’t want to see any rally attempt sold into
strength.
Bottom line the trend remains intact for now as no lower
lows were made, price is above its 50 Day and 20 Week SMA’s. But evidence is
beginning to mount that suggests Tech may be due for an extended rest over the
coming summer doldrums ahead.
