The stock market has traced what’s called a negative reversal pattern, which reminds me of March 2000.
In the year 2000, tech stocks crashed. Investors with portfolios primarily consisting of momentum stocks that were popular at that time ultimately lost over 90% of their value. This time is different, in some ways, but similar to 2000 as well. Nonetheless, prudent investors should pay attention.
Let’s examine the issue with the help of a chart.
Chart
Please click here for an annotated chart of the Nasdaq 100 ETF QQQ which tracks the Nasdaq 100 NDX.
Note the following:
• The chart shows a reversal day. The Nasdaq opened significantly higher than the prior day, but it closed lower than the prior day.
• A reversal in the momentum crowd’s favorite stocks was striking in its magnitude, though it’s not reflected in indices. Investors should look at intraday charts of these six stocks: Tesla TSLA, Fastly FSLY, Peloton PTON, Square SQ, Zoom ZM and DocuSign DOCU.
• The six stocks mentioned above are prime examples of many popular stocks of the day that, from a technical perspective, have nothing but air under them. This is the reason that they experienced huge drops on the reversal. If you think these six charts look bad, you ain’t seen nothing yet. Consider going back and viewing charts of popular tech stocks in the 1999-2000 time periods.
• The stocks mentioned above have a great story line that has captured the imagination of investors. However, their valuations are unsustainable, with the possible exceptions of Tesla and Square.
• The chart shows a trendline that has been in place since March in the stock market.
• The chart shows that the trendline is intact. Investors should carefully watch for a break or continuation of this trendline.
• On the positive side, the pattern was less pronounced in the Dow Jones Industrial Average DJIA and S&P 500 SPX. This is similar to the pattern in early 2000.
• Also encouraging for the bulls was that the five large-cap tech stocks of Apple AAPL, Microsoft MSFT, Amazon AMZN, Alphabet GOOG, GOOGL and Facebook FB held up well. This is similar to the pattern in early 2000.
• When the technical conditions are right, the stock market usually finds an excuse for a selloff. The excuse this time was the partial reclosing of California due to the coronavirus. Interestingly, “stay at home” stocks of the momentum crowd were sold hard on this reclosing. This indicates that the valuations of these stocks have reached unsustainable heights….Read more at Marketwatch.
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