Mixed Market Suggests Difficulties Lie Ahead
Either bulls or bears can make compelling points about today's stock market, but trying to time the top is a fool's errand.
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Strength in Tesla TSLA and Apple AAPL is keeping the Nasdaq 100 QQQ in positive territory, but breadth is around even, and there are more new 12-month lows than highs for the second day in a row. There are few pockets of strong momentum, and speculative traders don’t’ seem interested. Quite often, there is an upbeat mood in front of a holiday, but that isn’t the case right now.
The market’s mixed action is stirring up talk about a market top, but so far, the anticipatory bears have had very little luck in trying to time a turn.
One of the most common mistakes that investors make is trying too hard to time market turning points. Everyone likes the idea of being the hero who nails the exact top. It is a very hard impulse to ignore, especially when so many pundits and folks in the business media are talking about what the market might do next.
What makes timing tops and bottoms so difficult is that the market doesn’t pay attention to the brilliant arguments that bulls and bears may have. No matter what market conditions might be, there are always astute bulls and bears who construct compelling arguments about what will happen next. Sometimes, they are correct, but seldom is the timing very precise.
Currently, the primary bullish argument is that there is strong momentum both operationally and in the charts. AI is the biggest technological advance since the invention of the internet, and the economy is still chugging as inflation drifts lower. Why wouldn’t we remain positive?
The bears have a long list of worries, but the biggest market criticism is the extremely narrow market action. I am constantly pointing out how the indices don’t reflect what is going on with individual stocks, but it has mattered for a very long time.
Jason Goepfert of Sentimentrader has some interesting data. Since 1999, there have only been seven times when the Nasdaq Composite was at a 30-year high, but there were more stocks hitting new highs than new lows, and less than 40% of stocks were positive. That happened on Monday and also happened twice in June. Prior to that, it happened twice in 2021, once in 2015 and once in 1999.
Statistically, the market did not perform well after such an event. In 1999, the market was higher six months later, but in 2015 and 2021, the market was steadily lower for months afterward. It is too early in 2024 to determine if there will be a market response.
There isn’t very much data here, so it is hard to draw a firm conclusion, but it suggests that an extremely narrow market is a signal that difficulties lie ahead.
The question is, when is it the right time to act on this sort of data? Too many bears will be too fast to embrace the negative narrative, and they will pay a price for their poor timing. The better approach is to wait for some weaker action before embracing the idea that the narrow market is negative. Wait for some real proof in the form of struggling price action.
As I write, the Nasdaq 100 is moving higher and seems to like the comments that Jerome Powell just made in Portugal. There is no shift in the market action despite the warning bells that are ringing. My approach is to stay vigilant and cautious, but until there is a shift in market character, there is no reason to be overly bearish.
At the time of publication, DePorre had no positions in any securities mentioned.
