Correlation among the broader indices has been splintering over the past six months. The divergence of performance signals that the market is quickly turning favor “stock pickers” over “index investors.”
Click to EnlargeOr, more simply put: The “easy money” has been made. If you want to be profitable now, you’ll have to work at the stock level to earn your keep.
Recently, we’ve looked at the popular PowerShares QQQ Trust (QQQ) — an ETF that tracks the Nasdaq-100 — and an analysis of its components has revealed signs of correlation splintering
For example, QQQ itself has spent much of the month of June trading above its 50-day moving average. However, only 45% of the component companies in the index have done the same. The lagging breadth continues to signal a warning sign for investors holding the tech-favored ETF.
It’s increasingly important that stock pickers avoid the market’s laggards. Looking at the QQQ, a number of investor favorites fall into this category — and each of the Nasdaq stocks is worthy of jettisoning from your portfolio if you haven’t already.
Nasdaq Stocks: Google (GOOG, GOOGL)
The Internet search giant has been raising the legal beagle’s eyes in Europe as the company is under scrutiny for its privacy practices, or lack thereof.
For years, Google (GOOG, GOOGL) had been the innovator when it came to all things Internet — search, advertising, tracking, mail, all seamlessly fitting into their advertising model. However, over the past few years, the company’s focus appears to have turned to pet projects that the market may or may not really be interested in. Think Google Glass, Autonomous Cars and now “News Lab.”
Put simply, Google isn’t sticking to its niche.
While GOOGL stock is a market outperformer for the year to date, it hasn’t done much for some time. Google shares have spent four months trading in a range that looks ready to give way to the downside. Looking at the chart, the $540 price is the proverbial “line in the sand” that could give way to a 10% to 15% decline in value.
Overhead, the stock’s 20-month moving average has been acting as overhead resistance. The technical rub here is that a stock’s 20-month MA is the line of demarcation between a bull and bear market for a stock … and GOOGL is already trading in a bear market pattern.
Nasdaq Stocks: Yahoo (YHOO)
A carbon copy of Google, Yahoo (YHOO) has also wandered from its core competency, though that happened long ago. Outside of its investment in Alibaba (BABA), the company would have fallen from investors’ radars long ago.
Innovation is the lifeblood of a tech company’s future value, and Yahoo hasn’t been able to show that it has returned to their former self when it comes to this dynamic. Yes, Yahoo went on a buying spree of tech companies such as Tumblr. But results have been few and far between.
YHOO stock is now hanging onto its 20-month MA, currently at $40.65. A move below this trendline will signal that the stock has broken into a long-term technical bear trend, increasing selling pressure.
Nasdaq Stocks: Whole Foods Market (WFM)
Whole Foods Market (WFM) is not a technology company, but it has been one of the more popular companies within the QQQ. Since topping out in 2013, WFM has been feverishly trying to maintain its hold on the organic food market. Pressure from the larger chains like Kroger (KR) and Costco (COST) has put WFM on the defensive, and the charts show it.
From a technical perspective, WFM stock is testing a critical mark at $40. On a long-term basis, $40 serves as the site of what technicians refer to as a “double bottom.” A break below this double bottom will complete one of the more bearish patterns for a stock and target a 25% decline to the $30 level.
The charts are clearly telling investors to steer clear of WFM.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.