The markets are on pace to end their first 3 week losing streak since July of last year. While that would certainly be a good sign for market bulls, they should find it sobering that after that weekly losing streak came to end, the markets spent the better part of 2 months trading range bound to slightly lower. Personally, we wouldn’t be surprised to see the same type of scenario play out given that there still aren’t the key signs of a bottom we look for.
By now any of our regular readers know that those key signs mainly has to do with the action in oil. Other ingredients of a bottom though are a top in the dollar and the VIX, and a bottom in copper and the Dow Jones Transportation Index to name a few. However, we are seeing some signs that some key momentum stocks may have found their bottom. Remember, particular sectors tend to follow their leaders, so if those leaders have found their bottom then it could mean that sector’s bottom isn’t far behind.
Take a stock like AAPL for instance, which from its $644 all time high to its most recent low around $522 experienced an 19% pullback. While 19% is definitely a big pullback, even at $528 AAPL was still sitting on a 28% gain for the year. Moreover, that dip down to $522 seemed to spark some capitulation when analyzing the volume and price action. On 5/18 (the day AAPL hit $522), AAPL traded 26 million shares (its most since 4/24) in a range from $522-$543 before closing around $530 after closing at $530 the previous day.
This high volume and wide range that resulted in a closing level pretty much equal to the prior day suggests AAPL finally found a balance between supply and demand. As represented by the downtrend off of the $644 high, up until 5/18 supply was clearly outweighing demand in AAPL. Since that identical close on high volume though AAPL has bounced 10% to its high on Thursday of $576.50 its most organic bounce yet (we don’t consider the 11% bounce on 4/24 organic because it came in one day and was in reaction to the company’s earnings report). If AAPL can remain above $550 moving forward, it will imply the bottom is indeed in on AAPL which is a net positive for the tech sector.
We also believe that another high flying momentum stock, CMG, may have put in a bottom as well. From its all time high around $442 in April to its most recent low around $384 CMG pulled back 13%. The same day CMG hit $384 though it actually closed green, finishing around $393 (up from the prior days close around $392). Like AAPL, this close that was nearly identical to the previous days close after hitting a new low and then bouncing suggested supply and demand had come into balance after supply had previously been favored.
Also like AAPL, that activity came on the strongest upside volume for the stock in nearly a month. Even better though was what came next. The day after hitting $384, CMG experienced its highest volume on an up day since October which implies to us the market believes a bottom is in. Any pullbacks in CMG that hold the $395-$400 range should be considered bullish and its bottom would be a net positive for the consumer discretionary sector.
While AAPL & CMG have shown us constructive bottoming patterns the same cannot be said for other momentum stocks like CRM, LNKD, GOOG, LULU & KORS among others. This falls in line with our view that the overall market bottom isn’t it, but likely isn’t too far away either. In addition to watching your macro indicators like oil, don’t forget to keep an eye out on select stocks that have shown the ability to lead their respective sectors, as they could offer early clues before the broader sector does.
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