Monday turned into an incredibly difficult day for people who short the weakest parts of the market and long the tech space. It was a vicious reversal. The real problem is, why were the moves so dramatic? Below, I'll show you a large-cap tech name breaking down.
I shopped through the Nasdaq 100 charts, sorting stocks by best on Monday to worst. A few things became glaringly obvious. Large-cap tech is behaving weaker than it has in years. But other charts were also weak, including strong gainers in the small-cap and mid-cap space like ZM and PTON. Even TSLA couldn't rally. So let me share a few. These charts broke down today below signal lines, hence the change in tone from the newsletter on the weekend.
A bright light this year has been SHOP. Well, this is a mid-cap, so it is definitely in focus as one of the bigger names this year. The stock has given me two signals I don't like to ignore. The first is the SCTR ranking. The price action on the stock is one of the worst out there compared to its peers in the mid-cap group. It is only better than 22% of the stocks recently. The stock also broke the S&P 500 relative strength uptrend line on the purple area chart (RS). The price is testing support now, while the 200-DMA is just below. This rounded top is not great. The PPO is turning down below zero. If the rest of the big names were in an uptrend, this might just need time. However, they are all breaking down too.
Amazon (AMZN) is the big brother of Shopify. SHOP is going after a nice niche in Amazon's empire. But the two are sharing some strange traits. Amazon's price action is underperforming the large caps and is now in the lower range of the large-cap names at 40%. That's dramatic, given the stock was pinned to the top for months. The SCTR shows the stock weakening gradually. The purple panel shows the S&P 500 RS. That uptrend is broken and Amazon is now underperforming the SPX over a 4-month period. Price has the same dome structure as SHOP. Lastly, the PPO – momentum indicator – is having trouble staying above zero.
Here is the long term chart of AMZN. Look at the SCTR ranking tool, where Amazon goes in and out of favor. Now look what happens when the PPO is at a really high level and it goes out of favor. The stock price has not let go, relative to some of the other drops. Here is a large-cap tech name breaking down.
The next stock is Apple (AAPL). While most people associate Apple as this great company growing earnings, the earnings have been flat for years, but the stock keeps climbing. Below is a table from Yahoo Finance. Whether you look at the revenue (slight growth) or the net income (weakening from 2018-2020), Apple is a dog in Mega-cap tech clothing. This isn't a high growth company. But the stock has reached a $2 Trillion market cap on flat earnings or a slight (very slight) rise from $61B to $66 over three years or 3% a year. Safety being invested here?
Then there is the AAPL stock chart, which looks like the chart of a high growth company. The SCTR is breaking down for the first time in 18 months. The RS uptrend is breaking the line. Price recently tried to break out above the downtrend but failed in the circle. Apple shares topped at the split in Early September, with the $2 Trillion valuation. The momentum indicator on the lower panel (PPO) is having trouble staying above zero.
The chart is precariously perched on the uptrend. The current market cap is just under $2T and, historically, the stock trades with a P/E Ratio of 15x – 20x earnings. Well, it is double that at 35x in the header of the chart. If Apple loses a trillion dollars in market cap to get it back to its historical norm, should we be surprised? The phones and iPads have iterative improvements and the Watch is growing meaningfully. Even with all the app income in the company, it's NOT growing the bottom line. Is Apple just a news/music/movie consolidator? Have they moved on from great products to just being a data garage? 10,000 engineers and we get a larger phone, a smaller phone and a fitness bundle this fall.
So the SCTR ranking is dropping. How does that look in the big picture? (AAPL 10-Years) Check out what the stock has done while earnings grew 3% for the last 3 years. Another large cap tech name breaking down.
When I look at other charts, the Gamers (EA, TTWO, ATVI) look weak. ADBE looks weak. Broadcom (AVGO) looks weak. Then we get the price action on Monday, where we have a big bullish day, and the Nasdaq closes down on the information of a vaccine. It all lines up as the buyers are not showing up for work on the Nasdaq.
A fellow chartist on Twitter (The Bear Report) created a chart showing when the equal weight Russell outperformed the Nasdaq 100 by more than 5%. It was interesting. I sat down to try and get some ideas from that. My chart is not as clean. But what that ratio of QQQ:IWM suggests is big swings coming one way or the other. The other two times we have seen this was the early 2000s and the 2008 period. Is it a rotation into value, or just a move to get out of the way (cash)?
I will say this. The clusters on the ROC indicator suggest uneven times. I don't get comfort with the largest relative underperformance by the QQQ since 2008 and 2001. That doesn't look like a good map.
I have one last chart. Here is a chart of the $SPX with a 6-day rate of change indicator.
We are in rare air here. Is it the secondary rally after the initial surge months earlier, like in March 2009 and 2003? Or is it a top, like in 2000?
So just when you think it's the all clear, perhaps it's the lack of a wall of worry ahead. The election and the vaccine are both behind us with the data we have. Hard to know right now. Keep stops tight. If it kicks us out, we'll be happy.
Greg Schnell, CMT, MFTA
Greg Schnell, CMT, MFTA
Senior Technical Analyst, StockCharts.com
Author, Stock Charts For Dummies
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