What Major Indices Aren't Telling You

04/09/2014 6:00 am EST


Most of the commentary you read in the financial media tries to decipher what the markets are trying to tell you, but Frank Zorilla of ZorTrades.com reads between the lines to see what it is not telling you.

The Dow Jones, which is the family index, the one when that is quoted on the evening news and is the determinant in whether the market is doing well or not for most home gamers is down a measly 1.3% from the its highs. The SP500 is down less than 1% off its high and up 1% for the year. The Dow has a total of 30 stocks, and by many, it is not considered a true barometer due to the fact that it only has 30 stocks, the SP500 has 500 stocks and it’s a little broader, but at times to get a real feel, I tend to look at the Russell 3000, Russell 2000, and the Nasdaq.

Right now what the Dow and the SP500 are not telling you that:

  • 31% of the Russell 2000 stocks are off 20% or more from their 52-week highs
  • 26% of the Russell 3000 stocks are off 20% or more from their 52 week highs

The former leaders as a group: Netflix (NFLX), Chipotle (CMG), Amazon (AMZN), Tesla (TSLA), Priceline (PCLN), Facebook (FB), SPDR Biotech ETF (XBI), PowerShares Nasdaq 100 ETF (QQQ), and Yelp (YELP) are down 15% from their March high (see chart below). When you know this, then the recent article in the Wall Street Journal, about the stormy month at some hedge funds would not be a surprise. But for the home gamer who sees the Dow Jones on the evening news at highs and tells his wife that the market is doing well will be puzzled when his wife tells him; so why then is our technology mutual fund down 10% for the month.

From the Journal: “Andor Capital Management, one of the world’s biggest technology-focused hedge fund, plunged 18% last month. The $15 billion Discovery Capital Management lost 9.3% in its flagship fund. $9 billion Coatue Management flagship fund lost 8.7% in March and is down 7.4% for the year.”

If you put together a few of the stocks that were recently called the new leaders, the new stars, momo darlings etc.—Splunk (SPLK), Workday (WDAY), Yelp (YELP), FireEye (FEYE), Athena Health (ATHN), HomeAway (AWAY), Tableau Software (DATA), Shutterstock (SSTK)—as a group they are down 28% from their February 28 high. Now, some might call this rotation, others are calling it a masterful masquerading job by the family indices—the Dow Jones and SP500. My concern is that when the selling is so intense in these ex-leaders momentum names—will the rotational buying become rotational selling? And, if that is the case, I would assume the Dow and SP500 are next and will come under some pressure to catch up to awful action underneath the surface.

What makes the recent action interesting and different from the previous pullbacks of the last 18 months that conditioned people to disregard stops and buy all dips is that we have seen follow through selling in the individual names. In the previous pullbacks, we saw the leaders pull back, look like death, but immediately rally and go on to new highs, this pullback we saw the initial pullback, in some cases a really deep pullback, a weak bounce that was met with more selling—this is new.  If you look at the Nasdaq, Russell 2000, and the Nasdaq 100 we currently have a pattern of lower highs and lower lows.

Ex-market leaders Netflix, Chipotle, Amazon, Tesla, Priceline, Facebook, SPDR Biotech ETF, PowerShares Nasdaq 100 ETF

Click to Enlarge

Splunk, Workday, Yelp, FireEye, Athena Health, HomeAway, Tableau Software, Shutterstock

Click to Enlarge

This post is not to tell you where the market is headed, going, or my prediction etc…. All this could be completely irrelevant depending on your time frame. This is for the home gamers who just got a WTF moment, you know, you got your March statement you look at the performance, you look at the Dow at highs, you scratch your head and say—what the hell just happened, now you know. You are welcome.

By Frank Zorilla of ZorTrades.com

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