by Lance Roberts, Clarity Financial
Last week, we discussed the market hit new highs with the index getting back to more extended and overbought conditions.
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To wit:
“While market volatility did pick up this past week, the index held its breakout support levels and closed at a new high. Such keeps the bullish bias intact. However, as shown, the money flow signals are now back to more elevated levels, which will provide resistance to higher prices short term.
“The bulls are indeed in charge of the markets currently, but the clock is ticking.”
Not surprisingly, the market stumbled this past week as technology began to fade its recent outperformance. But, of course, investors have been piling into the trade as of late, pushing it to more overbought extremes. As noted by Sentiment Trader on Friday:
Of course, not surprisingly, investors are historically prone to “buying the most at the top.” With the seasonally weak trend of the Nasdaq approaching, with MACD’s triggering sell signals, there is likely to be some disappointment.
However, there are two reasons why investors are piling back into the 10-largest technology names:
- Portfolio managers need to be invested to generate performance, and the mega-cap Technology names are easy to “hide” in given the large daily trading volumes.
- These companies can generate earnings growth in a slowing economic environment.
The problem with the second point is that those top-10 mega-cap names generate the bulk of the earnings of the entire S&P 500 index. Such has only occurred at previous bull market peaks.
All of this suggests the risk of a correction remains elevated, particularly with the market priced for perfection.
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