Where Do Stocks Go From Here?

by JC Parets  -  April 26, 2019

Many people are surprised that we’re back to where things first fell apart for the S&P 500 Index and the Dow Jones Industrial Average last year. We had a severe correction in the fourth quarter, and now prices have climbed back to where this all got started.

At this point, nothing surprises me anymore. Those who are still “shocked” by anything probably haven’t been doing this very long…

The questions we find ourselves asking this week is simple. Are these major U.S. stock market indexes going to fail up here, like they did in October? Or, will they break out and rip to levels never seen before?

Here’s a chart of the S&P and the Dow running into resistance last year (You can see those epic failures in real time right here)

One-year history of the S&P 500 Index and the Dow Jones Industrial Average, with a potential “line of resistance” defined at index highs.

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For clues as to whether these moves will fail or break out, we can look to the leaders, those that’ve climbed Mount Everest before us to see how they reacted to these levels.

The Nasdaq 100 was the first to arrive. Here’s how that turned out:

One-year history of the Nasdaq 100 Index, showing a breakout to new highs.

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But the mid-caps and the small-caps are taking their nice, sweet time. They’re nowhere near last year’s highs:

One-year history of mid-cap and small-cap stocks, with both groups lagging well behind large-cap peers

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Contrary to popular belief, small-caps can lag while the broader market is going higher. That’s perfectly normal, as you can see here:

Long-term comparison of the performance of small-cap stocks with the S&P 500 Index.

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With large-caps leading the way, let’s break it down to the individual sector level to see how they’re reacting to last year’s highs.

Just 21 of the 59 sectors and industry groups we follow are positive since September. And only 19 are up since January 2018. So, let’s say a one-third of all stocks are up from each of those two important market peaks.

Another important step would be for the number of stocks making the “new 52-week high” list to exceed the number at last summer’s highs. We had bearish divergences the last time around, with fewer stocks hitting new highs as the S&P and the Dow broke out in September.

Fast-forward to today: A breakout to new all-time highs in these indexes accompanied by a new high in new 52-week highs would go a long way to convince me that this is more than just a retest of overhead supply.

We’re seeing mixed messages, for sure. I’d argue that because tech and the Nasdaq 100 have been the leaders – and the leaders are making new all-time highs – the rest will follow. It’s when we see failures by the leadership groups, like we did entering the fourth quarter, that we want to expect the others to fail too.

We want to keep an eye on what other stocks, sectors, and industry groups are doing as they run into similar hurdles. How do they resolve? That’s likely how a majority will resolve as well.

We’ll continue to focus on opportunities with well-defined risk and realistic upside reward.

To wise investing,

J.C. Parets
Editor, Big Market Trends