Even The Stronger Areas Of The Market Are Starting To Weaken

Tyler Durden's picture

Submitted by Dana Lyons,

We’ve spent the past few days in this space noting the recent thinning of the stock market advance. That is, despite the major averages continuing to hover near their 52-week highs, the internals are becoming uglier by the day. The main takeaway from this trend is that, should the relatively few areas of the market that are keeping it afloat begin to weaken, there will be precious little support left to prevent a significant correction. Indeed, we are beginning to see signs of deterioration now even among the stronger areas of the market. For example, the technology-heavy Nasdaq 100 (NDX) has been one of the stalwarts of this bull market rally, leading the recovery of the past few weeks to new all-time highs. However, even among its ranks, the NDX is really starting to thin out.

Witness the action in the equal-weight NDX, as represented by the First Trust Equal-Weight NDX ETF (Ticker, QQEW). Since this fund places an equal weighting on each of the consitituents, its performance is a good barometer of the overall health of the Nasdaq 100. And as the NDX powered some 3% above its previous highs over the past week, the QQEW has been unable to follow suit. In fact, it hasn’t even come within 1% of its June high. Furthermore, the ratio between the QQEW and the market cap-weighted NDX, as represented by the Powershares NDX ETF (QQQ) has recently broken its post-2012 uptrend and is presently plummeting to 2.5-year lows.




One might say that the strength lies in the biggest-cap names in the NDX and that they continue to perform well enough to boost the index. That is true, but our point is that, should those mega-caps begin to lose their footing, the sector will be subject to similar weakness as that being felt throughout an increasing large swath of the market. Today, we are witnessing just that as one of those leading mega-caps, Apple (AAPL), is getting taken to the woodshed. Due to AAPL’s massive weighting in the index, this is putting serious pressure on the Nasdaq 100 index.

Furthermore, similar breakdowns in the the equal-weight:cap-weight NDX ratio in the past have resulted in significant eventual damage to the cap-weighted NDX as well. Specifically, when the QQEW:QQQ ratio has hit an 18-month low while the QQQ was at a 52-week high, subsequent drawdowns in the intermediate-term have been well above average.




As the above chart notes, since the inception of the QQEW in 2006, this combination of conditions has resulted in a median 3-month drawdown in the QQQ of -9.8%. Even the minimum 3-month drawdown following the occurrences of -3.9% was greater than the median drawdown following all days of -3.6%. Here are the months in which these events occurred:

  • October 2007
  • July 2011 (actually missed by just 1 day, but conditions were similar enough to warrant inclusion in our view)
  • March 2012
  • August 2012
  • July 2014
  • July 2015

Thus far, the relatively few still-strong segments of the market have been able to prop up the major averages, masking some serious deterioration in the broader market. A break down of those strong areas would further weaken the already fragile support, leaving the market vulnerable to a serious correction. Today, we are seeing the kind of negative impact that just one leader (AAPL) can have on the market once it weakens. If we see many more leaders begin to break down, the resulting correction could feel like a 500-pound weight to the chest of investors.

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This is it's picture

And with that, it's hammer time.

junction's picture

This advice the experts are giving on the state of the stock markets is as reliable as what office workers were told on 9/11 after the first jet hit One World Trade Center at 8:47 AM. 

There was an intercom announcement from security officials at about 8:50 AM on the 44th floor elevator bank landing of Two World Trade Center on 9/11 telling people: "The evacuation is canceled.  Please return to your offices." 



Oh regional Indian's picture

Mark it.

Everyone in the markit is a mark.

If in, you ARE one. 

People laughing at bitcoin will be left burning their non-existant share certificates for heat this winter (remember DTCC) when all this goes breasts UP!


JLO's picture

Rome wasnt built in a day. But the builders expected it to last forever.

Oh regional Indian's picture

Did not die in a day either....in fact, it's still fucking alive and SUCKING, after all these years, ALL ROADS LEAD TO ROME...

Mundus vult decipi.....

PrayingMantis's picture



... the current crashing market is like ...

    ... a 767 flying over the North Atlantic; engine fails and the plane starts to go down. The stewardess runs into the cockpit, rips off her blouse and screams at the captain, "Please! Before I die, make me feel like a real woman!"  The captain stands up, rips off his shirt and says, "OK, iron this."

Ban KKiller's picture

Super old joke but still...funny. 

orangegeek's picture

All fine, but diverging data has been around since 2012.


We all know the turn down is going to happen.



The question is the timing of this turn - 5 years and counting. 


Estimating the growth in balance sheets of the top 20 central banks over the last 20 years would help.


Estimating the growth (contraction) of electricity consumption for the 20 largest economies over the last 20 years would help too.


Baltic Dry is in the toilet - haven't been above 2500 since 2010. 


CRB is dismantled (oh gee, I wonder why), but it's still calculated - at 209 - top of 475 (March 2009 low was 200) - deflation is here.


So big fat goobermunt is bidding up minimum wages, welfare and taxes to drive prices and create inflation - and no one is spending.  Corp inventories are through the roof.


Just want to know where yellen is putting all that beef after she takes delivery on live and feeders.


This is going to end uglier than ever thought of before.