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Is This Market Topping Out?

Some experts are prematurely saying the big run is over


Stocks fell again yesterday, for their worst day in three weeks. And the commodities markets had a very bad day, with gold, copper, and the energy complex falling throughout the day. The blame was placed on fears of a slowdown in global growth and a disappointing durable goods report.

In the afternoon, stocks rallied, taking back almost half of the losses, and the Dow Jones Industrial Average closed at 13,126, off 72 points, the S&P 500 fell 7 to 1,406, and the Nasdaq lost 15 points, falling to 3,105. Volume on the Big Board totaled 816 million shares while the Nasdaq traded 474 million. Decliners outpaced advancers by about 1.75-to-1 on both exchanges.

Analysts are always prone to blame a pullback on some tangible piece of news, like the durable goods report. But the report was disappointing only in the sense that it didn’t quite measure up to expectations. Analysts were looking for 2.9% growth and they got 2.2%, but that was up from a sharp drop in January.

The real reason for the decline was a technical one. After one of the stock market’s best starts ever, it is overbought and due for a consolidation.

The RSIs of the major indices are, with the exception of the Dow, in the high zone of the indicator. The S&P 500 is at 62, down from 69 just two days ago (70 is considered very overbought), and the Nasdaq is at 70, down from 75.66.

Dow Chart
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Russell 2000 Chart
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Trade of the Day Chart Key

But interestingly, the Russell 2000, a small-cap index, is only at 55.82, and the Dow is at 55.37. And so indices at opposite poles of investment quality are undervalued while the S&P 500 and Nasdaq are overvalued in terms of RSI. 

The explanation is that the technology stocks have been leading the charge, bolstered by an overweighted Apple (NASDAQ:AAPL), which ran from $411 on Jan. 3 to $617 yesterday.

After such a run, it is ordinary for those stocks pulled along by Apple’s success to take a breather. Some market mavens are prematurely (I think)  saying that the big run is over and that the remainder of the year will be spent sideways to down. 

But most markets don’t end big bull runs with just one sector like technology blowing off the top. In fact, the normal pattern is for rotation to take each sector to its highest point and then blow off with a final rush for the small caps, like the stocks that make up the Russell 2000. 

An avalanche of new issues is also characteristic of an impending top. Lately much has been made of a few new offerings that have done well like the debut of Annies, which rose 64% yesterday. 

But these new IPOs are nothing compared to what usually accompanies a market top. And the big ones, like Facebook (rumored to come in late May), Bertelsmann (Europe’s largest media company), and Brazil’s Banco BTG Pactual are all coming within several months. Bloomberg estimates that there is about $28 billion in IPOs waiting to go public.

After the IPO and small caps hit their highs, there will be plenty of time to exit the market, say in the month of May. Hmm, sound familiar?

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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