A group of elite companies that have driven growth for most of this year is sending a signal that may herald further losses.
According to Michael Kramer, a longtime independent market analyst and founder of Mott Capital Management.
A composite index of these eight stocks (both A grades
and class C
shares are included and count as separate issues) creation using FactSet data can be seen in the chart below.
Stock strategists use technical analysis to look for price patterns that can provide some insight into what may lie ahead for markets. While many are skeptical of its predictive power, the practice can at least help traders identify important levels at which demand has increased or decreased.
The triple top derives its name from the fact that a given stock or index has repeatedly failed to break a noticeable high. In this case, the Magnificent Seven recorded its highest closing level on July 18, when the composite index closed at 110.11.
According to FactSet data, they tested this level again on August 31, when they reached a high of 108.17. The last test came on October 11, when a level of 107.41 was reached.
Level 100 in the chart above represents the neckline in this pattern. A sustained break below the neckline is usually interpreted as a bearish signal.
Certainly, as Kramer noted, the market could swing either way, and a move higher at the end of the year is not out of the question if a new catalyst emerges that leads to higher stock prices.
We broke the neckline, which is a bearish setup, Kramer said during a phone call with MarketWatch. However, if we hold here, things will become bullish.
But the outlook for the Magnificent Seven and the rest of the Nasdaq index is looking increasingly bleak.
As of Thursday, the Nasdaq Composite COMP, an index that includes all Nasdaq-traded stocks but with a heavy weighting towards the Magnificent 7, along with its sister index the Nasdaq 100 NDX, was further into correction territory.
According to Dow Jones Market Data, it is on track to join it.
Stock prices have been falling since early August as yields on 10-year and 30-year Treasury bonds rose to 16-year highs, with the 10-year Treasury briefly topping 5% earlier this week for the first time since 2007 ., as FactSet data show.
Official government data released Thursday showed the U.S. economy boomed during the summer months. But that didn’t spare Mag 7 components such as Alphabet Inc., Meta Platforms Inc.
and Tesla Inc.
from publishing results that were disappointing, along with guidance that did not inspire confidence. Alphabets Class A and C shares fell more than 9.5% on Wednesday after the search giant posted earnings on Tuesday evening.
Many stock market analysts and economists, including Apollos Torsten Slok, point out that without Mag 7, the S&P 500 SPX index would have been lower since the beginning of the year. According to FactSet data, the index is up 8.3% since the beginning of the year, while the equally weighted version of the S&P 500 RSP index is down more than 3.%.
Dow Jones market data shows that the combined market capitalization of the Magnificent Seven group of companies rose by $3.6 trillion through Wednesday’s close, accounting for all of the increase in the market capitalization of the S&P 500 Index and then some to offset the year-to-date losses of the remaining 493 companies in index.
Investors will receive profits from another group of these elite companies, Amazon.com Inc.
after markets closed on Thursday, but the group’s favorite, Nvidia Corp.
is not expected to report before November 21.
Apple Inc. and Microsoft Corp. are also typically included in Mag 7, along with Alphabet, Tesla, Meta, Amazon, and Nvidia.
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