The tech-heavy Invesco QQQ Trust (QQQ) has continued to grind higher, notching fresh all-time peaks recently. Yet an ominous divergence has emerged as the underlying index scales new heights. Here are three key reasons this divergence should deeply concern investors, writes Nicholas Vardy, editor of The Global Guru.
More and more of the index’s component stocks are falling to new lows across multiple timeframes. This growing breadth deterioration has never been so extreme.
SOURCE: Sentimentrader.com
Why am I concerned?
1. It's an actual outlier event. The degree of weakness among Nasdaq 100 components relative to the index itself is unprecedented. Less than 3% of members, a figure not seen in over 25 years, trade above their 52-week highs versus lows.
Similarly, the proportion trading above their 10-day, 50-day, and 200-day moving averages is depressed. Only the 2007 peak before the Great Financial Crisis meltdown was worse.
2. History is flashing bright warning signs. History presents a worrisome pattern. When the number of stocks hitting new monthly or quarterly highs is outnumbered by those hitting new lows, the Nasdaq has typically pulled back over the medium term.
The few instances of similar 200-day moving average breakdowns were all followed by substantial losses within one to three months. The late 1990s tech bubble was the sole exception.
3. Momentum may not be enough. The counterargument is that big-tech momentum can defy breadth warnings. Seasonality also provides a tailwind over the next two months.
Momentum should never be discounted entirely, particularly in tech. But the internal rot lurking beneath the Nasdaq's surface is problematic. Sharp reversals have regularly followed similar setups in the past.
