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Is Market Breadth So Good That’s Its Bad?

Joanna Kong
Yahoo Finance Premium

Is it possible that market breadth is so good that it's bad? Absolutely! It's called being overbought from an internal standpoint -- and sometimes leads to a quick and dirty reset to the downside. But we also can rephrase this. "Is it possible that market breadth is so bad, that it's good?" Certainly! It's called a washout -- and usually is associated with an intermediate- to longer-term bottom. In a bull market, we'll take strong market-breadth statistics over not so strong any day. What's giving us pause is that the largest sector, Technology, is again leading in early 2020 and is about as extended internally as it can get.

Let's check in on the NASDAQ 100 (QQQ), which is 63% Technology and heavily weighted toward AAPL (12%) and MSFT (11%). We recently voiced our concern that those two heavyweights are stretched on a daily and weekly basis and in need of a rest.

One week ago, 85% of the NASDAQ 100 stocks were on point & figure (P&F) buy signals, while 85% of the index holdings were above their 200-day moving averages. Can these breadth measures get more extended? Yes, they can. But since 2013, 86% was the peak for P&F buy signals and 92% was the peak for QQQ components above their 200-day. Five of the last six times the QQQ's reached the 85% area for P&F buys, a pullback followed. And three of the last four times we saw 85% of the QQQ's over their 200-day, the index declined.

Regarding momentum, the 14-week RSI on the QQQ's is 80. In January 2018, it hit 84, which was the high for the bull market. We suspect any pullback will be quick, dirty, and scary, but limited in size. 

The logo of U.S. conglomerate General Electric is seen on the company building in Belfort, France, October 19, 2019. REUTERS/Vincent Kessler

General Electric (GE)

  • General Electric is a diversified industrials company. We think GE's progress under its new CEO will lead to higher earnings and higher multiples. Businesses include Aviation (41%), Healthcare (24%), Renewable Energy (23%), Power (18% sales) and GE Capital.

  • GE is a speculative turnaround situation in the near term as the stock has been in a downtrend since 2000, when it peaked at $60. Since bottoming in December 2018 at $6.66, the stock has traced out a complex bottom, as downside momentum has subsided. The shares completed the bullish reversal formation in November, reaching extreme overbought levels for the first time in many years (a bullish sign). The stock then traced out a bull flag, broke out again, and has been tracing out another flag since early January. A break over chart resistance at $12.23 opens the door for a possible move to the $14/$15 region.

  • Chart support from the recent low is at $10.75 and we would put a stop-loss just below there. We would take profits in the $14+ region.

A sign hangs in front of the world headquarters of Vertex Pharmaceuticals in Boston, Massachusetts, U.S., October 23, 2019. REUTERS/Brian Snyder

Vertex Pharmaceuticals (VRTX)

  • Vertex Pharmaceuticals develops therapies to address cystic fibrosis and other serious diseases. We believe the earnings outlook for Vertex is positive given the impressive growth of Symdeko, the expansion of reimbursement coverage, the FDA approval of Trikafta (a new triple-combination CF regimen), and strong cost controls.

  • VRTX broke out to all-time highs in late October following better-than-expected quarterly results. The stock then peaked in late November, traced out a very tight bull flag (which found support from its 21-day exponential average), and then broke out again early this year. Over the past couple of days, the stock has paused and may be tracing out another bull flag. According to Investors.com, VRTX has very high Composite, Group Relative Strength, and EPS ratings and high Relative Strength and Accumulation ratings.

  • Support sits near $214 from the recent low and we would put a stop-loss just below there. We would take profits in the $260+ region. 

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