Is It Time To Look For The New Market Leaders?

Forbes

06-04-2025

2018
The action last week reminded some veteran market observers of the Covid plunge when the Spyder Trust (SPY) dropped from a February 2020 high of $313.42 to a low six weeks later at $202.83. From the high to the low, this was a decline of 35.2 %.
The severity of the decline made me and others wonder whether this might be the start of a new bear market. The decline was so fast that many investors were not miserable for too long. The A/D lines moved above the Covid highs by July still It was a surprise that by August 8th, 2020, the SPY had closed back above the February 2020 high.
The investor pain in 2018 was even greater in my opinion as the SPY had a last-quarter decline of 13.9%. The 2.7% S&P decline in the abbreviated December 24th session led to headlines like this from the LA Times 'Stocks slump, bringing the S&P 500 to the brink of a bear market'. Many experts as well as CEO were discussing the concerns over a possible or imminent new recession.
NYSE 2018
On the daily chart of the NYSE Composite, the December 2018 plunge is very evident, as it dropped from 12624 to 10723. That was a decline of just over 15% in just 15 trading days. The plunge in the NYSE All A/D Line was equally sharp. On the December 24 drop well over 90% of the SPY and QQQ stocks were lower with over 90% of the volume on the sell side.
The NYSE All A/D Line was well below its EMA at the December lows while the survey from the American Association of Individual Investors (AAII) recorded a drop to 20% which was the lowest reading in two years. The A/D line rallied sharply and by January 4th it had moved above its EMA.
The A/D ratios were quite strong and by January 9th the initial downtrend, line b, had been broken. Just ten trading days later the longer-term downtrend, line a, was also overcome.
By February 15th the NYSE A/D line had moved above the September 2018 high and made a new all-time high. In my analysis, this indicated that the NYSE Composite would also now rally at least 9.5% to also make a new high. This did occur in November 2019.
Spyder Trust Weekly
The SPY's 9.1% decline last week slightly violated the August 2024 low of $505.48 (red arrow) as it closed the week at $505.28. That is 11.8 % below the 20-week EMA at $573.09 and the most oversold reading since 2022. The close was well below the yearly pivot at $551.51 which reversed the positive trend signal from the start of the year.
The yearly S1 is at $497.81 with additional support from April 2024 at $487.65, line a. The late 2021 and the early 2022 high is at $457-$578, line b, as this former resistance has become good support. The April starc- band at $521.04 has already been exceeded.
Invesco QQQ Trust & A/D Line
The Invesco QQQ Trust (QQQ) was down 9.9% last week to close at $422.67 and just below the S1 at $427.66. The October 2021 high, line a, is at $399.45 with additional support at $366.25, line b. The uptrend from the Covid and the late 2022 low, line c, corresponds to the yearly S2 at $337.51. Currently, QQQ is trading well below the 20-week EMA at $447.68 which is now strong resistance.
The weekly NDX 100 Advance/Decline line has closed exactly on its 21-period EMA but has been below its 21 WMA since the middle of March. The key support is now at the early 2025 low and then the uptrend from the 2020 and 2022 low, line e. The A/D line had staged a major upside breakout in late 2023 as the former resistance at line d, is now major support.
NYSE Composite Monthly
The large capitalization tech stocks led the market's decline but last week the common stocks, represented by the NYSE Composite, were also hit as it was down 8.6%. The close at 17,618 was well below the yearly pivot at 18,683 as the NYSE is just 3.3% above the yearly S1 at 17,033. The late 2021 high, line a, at 17,442 was almost reached last week. There is further support from July 2023 at 16,458, line b. The support from the 2022 and 2023 lows, line c, is currently at 16,498.
The monthly NYSE All A/D line made a new high in November with the NYSE Composite as no divergences were formed. The declining monthly A/D line is still above its rising EMA but the weekly A/D line has dropped further below its EMA and is now close to support from the early January lows.
Nasdaq Composite - Monthly
The Nasdaq Composite (COMPQ) has over 4600 issues compared to just 2860 for the NYSE Composite. The financial quality of the Nasdaq Composite stocks is not quite as high as that of the NYSE stocks and it often leads during market rallies and declines.
COMPQ has declined 22.8% from the December 15th high at 22,204 as it closed last week below the yearly S1 at 15,997 as well as the late 2021 high, line a. There is additional support now at 14,646, line b, and then the July 2023 high at 14,446. The close below the S1 makes the yearly S2 at 12,374 the next pivot target. There is chart resistance in the 17,000 area with the sharply declining 20-week EMA at 28,407.
The closeness of the major averages to long-term support when combined with the extremely high level of bearish sentiment does make it likely that the stock market will rally sharply in the next two weeks. That does not mean it will be a major low like what formed in early 2019 but it is possible.
Spyder Trust - Daily AAII
The daily chart of the SPY shows the down gaps in price last Thursday and Friday after the April pivot at $567.27 was tested on Wednesday. SPY closed 9.6% below its 20-day EMA which is the lowest reading since February 2020. The close at $505.28 was well below the daily starc- band at $523.51 and the August 2024 low. There is initial strong resistance in the $545-$550 area.
The S&P 500 A/D line spiked on April 2nd before dropping sharply to close well below its EMA. Even though SPY is now below all the lows going back to last August the A/D is still above the March lows as well as the stronger support from the December and January lows, line c. The stronger relative performance of the A/D line when compared to price is a sign of strength as it indicates more stocks are rising than falling.
Last week the American Association of Individual Investors (AAII) survey came in with the AAII Bull-AAII Bear reading of -40. This means there were 40% more investors who think stock prices will be lower in the next six months than those who think stocks will be higher. Readings below -30 are a contrarian level that bullish sentiment is too low.
My review of the technical evidence still does not indicate that we are in a bear market even though the market averages have dropped considerably more than I expected over the past two weeks. The market examples of 2018 and 2020 demonstrated that even after a scary and powerful decline the market averages can still make new highs.
The extreme selling on Thursday and Friday revealed that over 90% of the stocks on the NYSE declined and over 90% of the volume was declining volume. When this happens the historical data analysis reveals a very positive future market. In a recent post by Charlie Bilello found positive returns after large two-day declines for the next 1, 3, and 5 years.
Consumer Staples
Only the Consumer Staples Select (XLP) is up YTD and the relative performance analysis (RS), from the T&J Sector Watchlist, shows a positive trend since the start of the year. I will be watching the market closely over the next few weeks to find those stocks and ETFs that are performing better than the S&P 500. When the weight of the evidence favors a market bottom I will update my analysis.