After a decidedly bullish January, which continued strong market action into November and December, February had a decidedly different feel. But while breadth conditions have certainly become less bullish compared to late 2023, and the Hindenburg Omen heralded a potential end to the bullish phase, growth leadership names have remained quite strong overall.
The NYFANG+ index of top growth stocks is up about 12% year to date, while the S&P 500 and Nasdaq 100 have gained just 5%.
This chart highlights the “performance gap” between mega-cap growth stocks and pretty much everything else. But while stocks like NVIDIA Corp. NVDA are making headlines for their relentless uptrends and new all-time highs, it may be more important here to look at names that have recently gapped higher. In a bull market, breakouts tend to proliferate as major stocks push to new highs. But at the end of a bull market, you often see signs of buyer exhaustion, as the last anecdotal buyer has made the final purchase.
I think the three most important growth stocks to watch here are Meta Platforms HALFAmazon.com AMZNand Netflix NFLX. Let’s examine these three stocks together, noting the similarities between all three charts over the past two years.
META rose to around $325 in July 2023, then spent the next three to four months testing the same resistance level. AMZN has seen a very similar pattern, with a high in August 2023 around $143. For NFLX, it was a high in June and then a bust above the $450 level in July.
All three of these names broke out above that “pivot point” in November and December, and all three then rallied once their first quarter earnings were released in mid-January and early February. But something interesting happened after the higher gap a couple of weeks ago.
Notice how all three were essentially limited after the higher gap? All three names attempted to break out of the initial range established after the price gap, and all three failed to break out of the range. Netflix ended the week with a Dark Cloud Cover candlestick pattern, with a big bull day followed by a big bear day closing below the midpoint of the first day.
I have found the period immediately following the price gap to be crucial in assessing investor sentiment. If a stock has a higher gap and then trades higher, this shows that other buyers are coming and are willing to pay more for the same stock. If a stock trades lower after a price gap, this suggests profit taking, where previous investors were keen on making a profit.
But these three charts are kind of stuck in limbo, with no clear confirmation of the upside and so far no collapse of gap support. I have set price alerts for each of these three names at the upper end of their recent price gaps, as I believe this represents a “line in the sand” not only for these three growth stocks, but perhaps for the market overall as a Total.
There’s no denying seasonal weakness at this point in the election year. February and March tend to be a weaker time of year, and the deterioration in breadth conditions appears to be in line with this traditional calendar phenomenon. But I think the market’s most important indication may be how well these three leading names grow and whether they are able to maintain recent price gaps. And if these price gaps don’t hold, our growth-oriented benchmarks could really start to suffer.
RR#6, Dave
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David Keller, Chief Market Strategist CMT StockCharts.com
David Keller, CMT is Chief Market Strategist at StockCharts.com and President of Sierra Alpha Research LLC, where he helps investors make better decisions using behavioral finance and technical analysis. Dave is a professional CNBC contributor and summarizes market activity and interviews leading experts on his show “The Final Bar” on StockCharts TV. Dave is a former president of the CMT Association, a global non-profit organization of technical analysts, and was previously managing director of research at Fidelity Investments. David is a classically trained musician and student pilot and resides in Duvall, WA with his wife and two children. You can follow his thoughts on marketmisbehavior.comwhere he explores the relationship between behavioral psychology and financial markets.
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