Tech stocks have been the unequivocal winner in the stock market rally since the late-March lows. While the S&P 500 and Dow Jones Industrial Average have both climbed 43% off their lows, the tech-heavy Nasdaq Composite Index has surged 53% from its lows.
However, two seemingly innocuous events in the last few days may indicate that the bull market has petered out. With this, we are due for a large correction in the index.
The First Event
The first event occurred on Monday. The Nasdaq climbed roughly 2% it managed to set a new intraday record high. However, the index then fell to more than 4%, closing the day with a 2.1% loss.
According to analysts at Bespoke Investment Group, the index setting an intraday record high and then closing at a loss is rare. Their research shows it has only occurred twice prior to Monday: January 24 and March 7, 2000.
“And although the Nasdaq was up the following day both times, you don’t need us to remind you what happened over the long-term from there,” the Bespoke analysts wrote in a recent report, alluding to the significant market correction from March through May of 2000.
Jason Goepfert, head of SentimentTrader and founder of independent investment research firm Sundial Capital Research, says that isn’t the only odd occurrence in the markets right now.
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The Second Event
He points out the second event, which is the measure of volatility for Nasdaq, the Cboe Nasdaq Volatility Index, or VXN, is climbing alongside the Nasdaq-100. The Nasdaq-100 consists of the 100 biggest members of the tech-heavy Nasdaq Composite.
The volatility gauges, like VXN, measure expectations for coming volatility and typically rise as the underlying index falls. Goepfert says the two moving higher in tandem has never occurred before.
Additionally, the VXN is trading higher than the volatility index for the S&P 500, the VIX. According to Bespoke Investment Group chief strategist Julian Emanuel, the VXN is trading at 37.61, a bit higher than the S&P 500’s volatility index, the VIX, which is trading at 29.52.
“As questions mount about whether the surge in VXN in recent weeks, uncharacteristic in a rising NDX tape, is indicative of a ‘blowoff’ or a ‘blowup’ or both we note that such ‘fast and furious’ shifts between VXN and VIX have tended to correspond to NDX absolute and relative underperformance, especially on a 3-month time frame,” Emanuel and analyst Michael Chu wrote in a recent note.
While not rare, there is another indication that the markets may be due for a correction. This indication is the level of confidence investors have right now. Retail investors, known as the “dumb money” are nearing their highest level of confidence since June 8. There are instances when the “dumb money” reaches an emotional extreme, either confidence or despair. When it happens, it’s generally a good indication that things will quickly swing back in the other direction.
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