Jeff Cooper: Market Disconnect Sees All-Time Highs in S&P While Highfliers Take a Beating
Either the former leaders are going to pick themselves up by their bootstraps and play catch-up to the S&P, or the index is going to play downside catch-up.
I can't ever remember seeing the kind of bloodbath that has occurred during the last few weeks in the glamour stocks, highfliers, and former leaders -- the stocks that captured the heart and soul of speculative sentiment -- while the S&P 500 (INDEXSP:.INX) and the Dow Jones Industrial Average (INDEXDJX:.DJI) simultaneously sit at all-time highs.
Names include Splunk (NASDAQ:SPLK), FireEye (NASDAQ:FEYE), Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN), Yelp (NYSE:YELP), and NetSuite (NYSE:N), to mention just a few.
FireEye is a stock that had an idealized square-out at around $60, which I recently explained [subscription required]. It rallied off $60, but yesterday's ugly action is a good example of what plays out when a square breaks.
Either the former leaders are going to pick themselves up by their bootstraps and play catch-up to the S&P, or the S&P is going to play downside catch-up.
I think the S&P is likely to falter.
Yelp and NetSuite were short trading ideas from Wednesday's (April 2) nightly report [subscription required] for trading yesterday.
Their intraday charts below reflect the intense selling pressure into the bell, despite the comeback in the S&P and the Dow.
NetSuite 10-Minute Chart for Yesterday:
Yelp 10-Minute Chart for Yesterday:
And here's a look at the daily charts of Splunk, FireEye, Yelp, and NetSuite:
In yesterday's report, [subscription required] I showed the extreme bullish sentiment reflected in the Investors Intelligence bull-to-bear ratio, which was at levels only seen three other times since the 1980s. Two of those times saw the extreme levels followed by six to 18 months of sideways action in the markets. The third time was 1987. Need I say more?
It is interesting that the current bullish sentiment comes at a time when, arguably, the bull market has been induced by the Federal Reserve's QE program. Few market participants have suggested that if the Fed has a mandate to keep the market buoyant, it may be enabled by high-frequency trading (HFT). Why have the regulators permitted HFT, a strategy that cancels 99 out of every 100 orders placed?
Either the market is built for capital formation and allocation or it's a shell game, a casino where skimming just comes with the territory and folks turn a blind eye to it because it's an entertainment industry. You know, the same way movie theaters make their money by selling junk food for three times what it costs around the corner.
Saying that HFT provides liquidity is a canard. As Rick Santelli aptly says, "Liquidity is not the same as volume. You're not providing liquidity if you're not taking risk."
It's an interesting synchronicity that Michael Lewis's Flash Boys is the topic of hot debate as the recent highfliers have become Crash Boys.
I can't help but wonder if what traders and investors have seen so far is a shot across the bow and if the wheels will come off as the historic cycles I've been pointing to hit. Or, should I say, more wheels come off?
It's interesting that the current historic bullish sentiment follows the worst performing decade for equities in US history and that the current bipolarization in the market is happening at a time when the bull market reached the 60-month-old mark -- a period that has augured in several significant changes in the trend.
These periods include 1982 to 1987, 1995 to 2000, 2002 to 2007, and, of course, 1932 to 1937.
Conclusion: Just because there is the potential for something to happen technically in the market doesn't mean it has to happen. And, as offered above, overbought and overowned extremes can be walked off by waterfall events or long sideways consolidations. But the action in the glamour stocks lately suggests that something pernicious may be afoot. There is a change in character in the market. I think it pays to believe what you see.
In addition to a confluence of historic cycles in April, I also see that the Gann Panic Window is on the clock on the NASDAQ-100 (INDEXNASDAQ:NDX) and the Russell 2000 (INDEXRUSSELL:RUT). This is a crash window that is 49 to 55 days from the high. In this instance, the count began around March 7.
While the S&P and the Dow have not conformed to the pattern by making nominal new highs, I think the important consideration is that time is more important than price. And so far, investors and traders are dealing with nominal new highs in the S&P. Moreover, as shown in yesterday's report [subscription required], the S&P has carved out a possible Megaphone Top within a Megaphone Top.
Megaphone Top Chart:
These two broadening formations are within the context of a 13-year possible Megaphone Top on the S&P, the final touch of which was satisfied in the first quarter of 2014.
Form Reading Section:
Amazon (NASDAQ:AMZN) Daily Chart:
Amazon Square of 9 Chart:
Click to enlarge
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