Has the Stock Market Peaked? A Tale of 2 Tapes

Has the Stock Market Peaked? A Tale of 2 Tapes

Posted On November 23, 2021 1:03 pm

After hitting multiple highs last week and starting strong on Monday, the major indices such as PowerShares Nasdaq 100 (QQQ) and SPDR S&P 500 (SPY) sharply reversed lower — ending the day down by 1%-plus each with the selling continuing this morning.

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From a technical standpoint, Monday’s reversal left a bearish topping tale on the charts; usually a good signal for a trend change.  

Am I calling a top?  Not a chance. 

Do I think this is the start of significant correction?  Not really.  But, that’s because the correction has been underway for the past few months. 

What do I mean by that?  Basically, it’s back to the recurring theme that the “market” has been a tale of two tapes; there’s the headline index numbers, which are controlled by a handful of mega-cap tech names 

Even as SPY and QQQ made new highs in the past few weeks, market breadth and internals had been deteriorating.  In fact, last week the Nasdaq saw three straight days of new lows, even as the index was hitting new highs.  I don’t think I’ve ever seen anything like this. 

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nasdaq 100

nasadq new lows chart

Look at how the percentage of Nasdaq trading above its 200-day moving average has dropped dramatically over six months. This gives you a sense of just how narrow the market rally had become lately.

nasdaq stocks above dma

Here’s a (small) sampling of the pain being inflicted on some of the growth darlings; many are now down 50% from their 52-week highs. And there’s no relief in these names today.

stocks all time closing high %'s

Now, one could argue that the selling in many of these names is actually healthy because it takes a lot of the froth out of the ridiculous valuations these companies had been awarded.  And remember, despite the recent kneecapping, many of these shares are still higher, some significantly more than they were 18 months ago. For example, Zoom (ZM) — down 20% today and also down 64% from its 52-week high — is still up 100% from March 2020. 

And while breadth is a reasonable sign of market health it’s not necessarily a great predictor of future price action. In fact, the most positive breadth of the year occurred on September 2nd, which marked an intermediate top which was followed by 5% over the next few weeks; the largest pullback of 2021. If on the other hand, you’d been trying to short the SPY or QQQ over the past few weeks, based on the deteriorating breadth, it would’ve been a painfully-losing proposition. 

Again, this speaks to this market as a tale of two tapes.  It also explains why many of the most experienced traders I know, myself included, who like to have both bullish and bearish positions, are finding this to be a very difficult trading environment.  It was very hard to look to short any of those names listed above, even as their stocks broke down; while SPY and QQQ are trending straight up. 

We’ll see if this recent decline in SPY and QQQ is simply a slight reversion to the mean or the start of a new storyline. 

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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.