Collapse of megacap growth confirms bearish phase | a cautious investor

Our major equity benchmarks had a surprisingly strong first quarter of 2024, but breadth conditions have been worsening since mid-March. Despite weakening breadth and initial collapse of the S&P 500 The Nasdaq 100 of leading growth stocks, including the previously described Magnificent 7 stocks, maintained a clearly defined upward trend.

This week, some of the S&P 500’s best-performing stocks finally broke below their 50-day moving averages. While this signal itself is not indicative of a market top, this analysis is just one of many clear signs that the bull market of the October 2023 lows may be over.

Today, we briefly review some of our early analysis of the megacap growth space, and how some of the top SCTR stocks are faring. The recent weakness shows why the collapse of the “Fantastic Four” (current frontrunners to replace the “Magnificent 7” moniker) could represent a key confirmation of a new bearish phase.

Initial Analysis: Apple (AAPL) and Tesla (TSLA)

Tesla’s downward trend was confirmed starting in July 2023, and Apple’s technical composition showed weakness after failing to break the $200 level in December and January. But both charts hit new lows this week, both literally and figuratively.

Note that both charts have remained below their downward 50-day moving averages since mid-January. Also observe how both attempts to break above their moving averages have failed in recent months. I’ve learned that when a stock is making lower lows and highs and is trending below its downward moving average, it’s best not to take action until some of those conditions start to change.

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As these stocks tumbled, unlike most other major growth stocks, the S&P 500 and Nasdaq 100 rose much further. So let’s take a look at some of the stocks that showed leadership in the first quarter.

Top SCTR: Super Micro Computer (SMCI) and MicroStrategy (MSTR)

Here are two names that were little known until they experienced exponential gains earlier this year. And while it certainly seemed overextended in March, both have now come down to reality.

From the end of 2023 to their peak in March 2024, SMCI and MSTR rose 350% and 175%, respectively. Both were far from their moving average support levels and showed clear signs of overbought conditions. Both stocks have been trading much lower so far in April, and each finished this week trading below their 50-day moving averages.

It is normal for stocks in a strong upward trend to pull back and test moving average support. In fact, the 50-day moving average often serves as a potential entry point for “buy when it dips” strategies. However, we have found that when top performers fail to maintain these critical levels of short-term support, this often means a broader shift towards more risk-averse positioning.

How about the best of the biggest, the grandest of the Magnificent Seven?

Breakdown of the Fantastic Four: Netflix (NFLX) and Amazon (AMZN)

That brings us to perhaps the most concerning development of the week. As I recently posted on my social media accounts, “As long as $AMZN and $NFLX stay above their 50-day moving averages, we can argue for a ‘short-term decline’ rather than a ‘long-term, painful decline.'” Unfortunately, this week we Finally, we observed the breakdown of these failures.

Megacap growth stocks exert enormous influence on stock benchmarks dominated by our top growth stocks. In recent weeks, differences in bearish momentum, weakening breadth, and the collapse of “sand edge” support levels have led us to consider market weakness rather than market strength. But the resilience of Fantastic Four stock has given us a glimmer of hope that the decline may be limited.

Considering my analysis of previous top performers charts this week, I think this could be the start of a big bearish phase in Q2 2024.

RR#6,

dave

P.s Are you ready to upgrade your investment process? Check out our free behavioral investing course!

David Keller, CMT

Chief Market Strategist

StockCharts.com

disclaimer: This blog is for educational purposes only and should not be construed as financial advice. You should not use any of our ideas and strategies without first evaluating your personal and financial situation or consulting a financial professional.

The author had no positions in any securities mentioned at the time of publication. All opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.