Changing Winds for the Stock Market’s Leaders

The Dow and S&P 500 (SNP:^GSPC) have declined 2% from their highs, while the Nasdaq (NASDAQGIDS:^IXIC) and Russell 2000 (NYSEARCA:IWM) have been hit much harder, down over 5% each from their March price tops.

This is a big difference from pullbacks of the past when the higher beta indices such as technology companies and small caps were much less affected by broader market pullbacks.

Why is this time so different?

The Winds have Shifted

The chart below is similar to one provided along with commentary to our Technical Forecast readers and shows that the Nasdaq Composite Index (NASDAQGM:QQQ) has closed below its 100 day moving average for the first time since December 2012.

This is a record number of days without a pullback at least to the 100 day moving average since the Nasdaq’s history began in the early 1970s.  It has been over 300 trading days since this index last flirted with its long term trend as measured by its moving average.

In other words, the Nasdaq has been on a tear and is certainly due for a pullback.  But how big should we expect?

The Leaders are Still Leading…But to the Downside

If the previous hottest sectors such as Biotech (NYSEARCA:IBB) and Google (NASDAQGS:GOOG) are any clue, this could be just the beginning.

There is no doubt that Biotech has been a very hot sector.  The ETF that tracks Biotech companies has risen over 300% since the 2009 market lows and over 200% since the market’s last 20% pullback in 2011.

(View my recent Apple video to see how I used technicals in January to short Apple ahead of the company’s 8% earnings decline)

The chart below shows that biotech stocks have declined thus far more than any other pullback since that same 2011 sell-off, now also hitting 20%.

The technology sector’s (NYSEARCA:XLK) previous large cap high flyer, Google, is in a similar boat, down 13% from its peak, also marking a significant change in trend.

For more on why it is troubling to see leaders becoming laggards, see my article “Stock Market Breadth Continues to Wane and Warn” published on 4/1/14.

Biotech, Google, and other previous market leaders are now warning that this pullback is indeed different, and prudent investors should take notice.

It has been 16 months since the Nasdaq last closed below its 100-day moving average.  Even heading into the year 2000′s tech bubble, the Nasdaq only had a run of 141 days before pulling back to this long term moving average in 1999.

The latest run that hit 316 days suggests the markets, especially the higher beta indices, likely have gotten way ahead of itself.  The leaders that are now leading the markets down are now supporting such a thesis.

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