Stock Market Flashes Sell Signals, ‘Topping Pattern:’ Leading Names Distributed

Investor’s Business Daily changed its widely-followed stock market outlook from “uptrend under pressure” to “market in correction” Friday evening after the Dow Jones Industrial Average (^DJI), NASDAQ Composite Index (^IXIC), and Standard and Poor’s 500 Index (^GSPC) each shed close to 2 percent.

Trading volume increased by 15.6 percent on the New York Stock Exchange and 17.9 percent on the NASDAQ, marking the ninth day of distribution for the NASDAQ and eighth for the S&P500 in recent weeks.

Friday’s selling brought the NASDAQ, Dow, and S&P500 below their 50- and 200-day moving averages, further compounding the negative view.

Leading growth names like LGI Homes, Inc. (NASDAQ: LGIH) and Fleetmatix Group PLC (NASDAQ: FLTX), which had been in sharp upward trends, were each sold in heavy volume Friday, closing near their lows for the day.

Many stock traders have begun to refer a group of stocks as FANG stocks. These are Facebook, Inc (NASDAQ: FB), Amazon.com Inc. (NASDAQ: AMZN), Netflix, Inc. (NASDAQ; NFLX), and Alphabet (formerly Google) Inc. (NASDAQ: GOOG, GOOGL).

This group receives attention because each company is profitable, features strong growth, and is big enough that each is considered to be a must-own name by institutional investors, such as pension and mutual fund managers. Netflix, the smallest of the four FANG companies, has a market capitalization of $50.8 billion. Wall Street analysts expect annual earnings per share growth of 24.5 percent over the coming five years for Netflix.

On Friday, shares of Facebook closed down 3.1 percent, shares of Amazon closed down 3.4 percent, Netflix’s were down 3.3 percent and Alphabet’s two share classes were down 1.3 and 1.4 percent. Trading volume was above average in all but Netflix’s shares, which was just below.

While no two stocks are the same, stocks tend to move in broad trends together. When the Dow, NASDAQ, and S&P500 are in upward trends, most individual stocks will be as well. Conversely, when the broad market averages begin to sell off, individual stocks tend to follow.

When broad stock market sell-offs occur, stocks that bounce back most quickly, and reach new high price ground the fastest, tend to go on to experience the biggest price advances.

While some investors claim to utilize models that allow them to glean insight into the depth and duration of stock market sell-offs, such as recent analysis stating that the Dow could begin a 70 percent correction in coming weeks, as reported by the Street, the distribution day method outline by IBD does not.

The publication recommends that investors wait in cash until markets stage “follow-through days” and leading stocks, such as the FANG names, and others with strong profit growth, break-out to new high ground. IBD will change their market outlook to “uptrend” should this occur.

Gary Kaltbaum, a commentator with Fox News and president of Kaltbaum Capital Management, describes recent market action in the Dow and NASDAQ as “a very large topping pattern.”

“This only adds to the recent misery in most of the market sectors,” Kaltbaum was quoted with regard to the sell-off below moving averages and distribution in the major indices.

Chair of the Board of Governors of the Federal Reserve System Janet Yellen will address markets on Wednesday, December 16, after Fed officials meet. Yellen is widely expected to announce an interest rate increase of 0.25 percent in the key Federal Funds overnight rate, effectively tightening credit in the United States for the first time since the 2008 subprime collapse and signalling that, for the first time in almost a decade, Yellen and Federal Reserve officials see concerns with growth becoming secondary to concerns with inflation.

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