The anticipation for a tasty and heavy turkey dinner is often followed by an unruly urge to nap. Stocks tend to feel the same way.
Long-term stats tell us that bullish seasonality leading up to Thanksgiving (and other holidays) is often followed by some sort of post holiday hangover.
The S&P 500 (SNP: ^GSPC), Dow Jones and in particular the Nasdaq fulfilled the first part of the equation (pre-holiday strength), but will there be a post-holiday tryptophan hangover?
The stock market’s up trend has yet to be broken, but it is weakening and headwinds are picking up.
Tiring Up Trend
The percentage of S&P 500 stocks above their 50-day simple moving average (SMA) has fallen from 87% on October 22 to 76% on Wednesday.
Another way to measure market breadth is by the number of new highs. The Nasdaq (Nasdaq: ^IXIC) chart below plots the Nasdaq Composite against the number of new 1-year Nasdaq Composite highs.
There were 445 new Nasdaq 1-year highs on October 18, but only 357 on November 27.
This means that a fair number of stocks are already failing to perform, while a few heavy weighted large cap stocks like Apple and Google buoy the broad indexes a la S&P 500 and Nasdaq.
Investors are Embracing the ‘Most Hated Rally’ Ever
Up until a few weeks ago investors and the media despised the FFF (fake Fed-fueled) rally. Things started to change in early November when various sentiment polls showed increased bullishness.
Via the November 13 Profit Radar Report I recommended a crazy S&P 500 trade at 1,775:
“I would totally understand if you called me crazy for even suggesting to go long right now. There’s no arguing that investment sentiment gauges are redlining.
But the financial media has not yet been swept up by the euphoria conveyed by various polls/gauges, which allows for more temporary gains. Regardless of sentiment, technicals suggested that stocks want to move at least a little bit higher.”
Investors were bullish on November 13 and are even more bullish today. In fact, according to Investors Intelligence (II), the percentage of bullish investment advisors and newsletter-writing colleagues is the highest since April 2011 and the percentage of bearish advisors the lowest since the late 1980s.
When most investors are all in, the only action left to do is cash out. When buyers dry up sellers show up.
Speed Bumps Ahead
Technicals were bullish on November 13, but now there are a few technical ‘speed bumps’ ahead.
The S&P 500 is about to hit a small Fibonacci projection level, the Dow Jones (DJI: ^DJI) is about to touch technical resistance (looks more like a barricade than speed bump) that’s been 13 years in the making (more below) and Apple, the key component of the S&P 500 and Nasdaq is within striking distance of double resistance.
None of this guarantees that stocks will decline, but the weight of evidence suggests that the S&P 500, Dow Jones and Nasdaq are due for a nap.
Extremes, such as bullish sentiment and lagging breath, can go on longer then expected (thus the saying: “The market can stay irrational longer than you can stay solvent), so when is the correction (aka nap) likely to start?
Here’s the best answer to this question: The long-term chart of the Dow Jones along with the resistance (barricade?) that’s been 13 years in the making.
Forgot Dow 16,000 – Here’s the Real ‘Bubble Popper’
Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report uses technical analysis, dozens of investor sentiment gauges, seasonal patterns and a healthy portion of common sense to spot low-risk, high probability trades (see track record below).
Follow Simon on Twitter @ iSPYETF or sign up for the iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.