Is a market correction imminent?

Last week, the SPDR Technology Select Sector fund rallied NYSEARCA: XLK faltered as many major stocks traded off previous highs or posted small gains.

It looks like the tech rally is running out of steam. That’s not to say big tech is about to lead S&P 500 stocks into a significant correction; Earnings estimates for the sector and the S&P 500 Index as a whole are optimistic.

But even with great fundamentals and the huge potential for AI stocks, the overall stock market can and does show signs of exhaustion after a long period of bullishness.

The most heavily weighted technology stocks and their one-week returns are:

Microsoft Corp. NASDAQ:MSFT: +3.93%

The Apple company. NASDAQ:AAPL: +2.37%

Nvidia Corp. NASDAQ:NVDA: -5.10%

Broadcom Inc. NASDAQ: AVGO: -10.29%

Advanced Micro Devices Inc. NASDAQ:AMD: -11.51%

Furthermore, the main communication services make Meta Platforms Inc. available. NASDAQ: META is down 3.98% for the week.

Nvidia shares: above-average bearish trades

While Nvidia isn’t the biggest technology in terms of market capitalization, and that honor goes to Microsoft, it is clearly the benchmark for industry performance.

Nvidia’s chart shows that shares have traded lower in four of the last five sessions, with downside volume that has been heavier than normal in five of the last six sessions.

When high-volume selling increases in a leading stock, it’s often a sign that investors are seizing the opportunity to pocket some profits.

Is the S&P 500 ready for a pullback?

Since the end of October, the S&P 500 has returned 22%. This is right around the level where rallies start to lose momentum and retreat into a correction.

This is a fast rally in a fairly short time frame, which means a lot of capital has been deployed quickly.

The SPY ETF fell 0.99% in large volume on March 15, as investors feared that sticky inflation had returned, following earlier optimism.

The S&P 500 is now positioned nearly 12% above its 200-day moving average. It has been trading above that line since early November, with valuations currently looking elevated.

According to data from Yardeni Research, the forward price-to-earnings ratio of the S&P 500 is 20.5. It has been increasing since 2022.

Bearish chart action

The S&P 500 has posted the same recent results as Nvidia, with losses in four of the last five sessions, as of March 15. Furthermore, it did not collapse following any particular economic or corporate news. This is often a sign of shopper exhaustion.

Many investors and traders noticed Nvidia’s price action on March 8, when the stock gapped up at the open and rallied to a new high, before buyers stepped in, sending Nvidia stock to a decline of 5.55% for the session. The volume was more than triple the average.

In fact, the intraday price swing was more than 10%. It’s not that Nvidia’s performance that day, or in subsequent sessions, indicates that a meltdown is near, or that a market crash is around the corner.

However, this shows that savvy investors might consider taking profits at this juncture.

More sales ahead?

If sellers have momentum in Nvidia, Meta Platforms, and major AI chip stocks like AMD and Broadcom, the market could be primed for a further period of decline.

Selling into a large market can trigger a domino effect; when investors see widespread selling, fear and uncertainty increase, prompting more people to sell to mitigate losses.

This mass selling pressure can cause stock prices to collapse quickly, eroding market confidence.

Furthermore, algorithmic trading programs, designed to exploit market trends, exacerbate the situation by automatically selling when predefined conditions are met, further intensifying the selling spree.

None of this is to say that a complete market meltdown is on the horizon; general market fundamentals still appear strong. However, for those who prefer to trade tactically rather than stay for the long term, there may be some signs of trouble.

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