Through all the ebbs and flows in 2013, the leaders have been pretty consistent. Biotechs, TSLA, NFLX, and social media stocks have been the big winners (I detailed the leaders in my Macro Wrap earlier this month). Momentum traders have had a jolly time riding those winners as they stair stepped higher. So yesterday’s price action caught many traders’ attention. Beta was out of favor, and winners were for sale.
Granted, the market could find new leadership. In fact, financial stocks, which were a big leader in the first half of 2013, have been consistently lagging the market since July, but the broader market has held up. XLF/SPY ratio in 2013:
The relative weakness in financials has been made up for by the strength in the Nasdaq stocks. Once again, the market’s strength last week was accompanied by fresh breakouts in leaders like the major biotech stocks. So far, so good. However, yesterday’s price action saw each of the big biotech leaders fall back below their breakout levels.
CELG, BIIB, GILD, and AMGN all look more like false breakouts today. I noted in yesterday’s CotD post that GMCR had also fallen from its leadership perch with yesterday’s selloff. With leaders struggling to hold last week’s advance, it’s no surprise that the indices are also failing to hold the gains. The S&P 500 index is at a crucial juncture from a technical perspective:
While the August high around 1710 (red) was cleanly breached yesterday, I view the May high around 1687 (green) as the more important level. The psychological backdrop is especially pivotal today because the selling that we’re seeing follows the unexpected surprise from the Fed. That surprise was almost uniformly greeted by stock market cheers. Thus, the subsequent weakness has likely left many new buyers (and thus, likely weak hands) nervously eyeing current price action. In other words, the market psychology could be more fragile, despite the relatively high prices.
Add to that the weakness of the market’s reliable leaders in 2013, and the setup looks bearish. But as I noted last week, the market has shrugged off any and all warnings signs in 2013. Whether the leaders can regain their prior highs or not is a valuable market tell to see if this selloff is another shallow tease, or something more substantial.