Leading Sectors Breaking Down – Internet & Social Stocks
Courtesy of Chris Vermeulen
In July I showed talked about the Russell 2K index and how it was underperforming the broad market. I explained what it likely meant for the US stock market this fall. The outlook was negative, just in case you were wondering.
This week I will discuss two sectors that have often lead the broad market in rallies and corrections over the years. These sectors have underperformed the broad market much like small cap stocks. This does not bode well for investors going into fall.
In the analysis below I use Bollinger bands and trendlines. Using only these tools keeps the charts clean and easy to understand. In short, a broken trendline is the first early warning that a trend may be coming to an end. The second is the break of a Bollinger band.
A combination of these can be taken as a trend reversal and the likely start of a multi-week or month correction, depending on your chart's time-frame. I use a similar method to identify trends with my automated futures trading system.
INTERNET INDEX FUND ANALYSIS
SOCIAL MEDIA INDEX FUND ANALYSIS
My outlook on exactly what these two charts are pointing to is as follows:
Because we have seen the support trend lines broken to the downside this month, and the fact that price has pushed more than two standard deviations from its norm, the odds favor more downside.
Based on years of experience trading price patterns and breakouts, I've learned that when price breaks to the downside and triggers fear among investors, it is typically the best time to sell short and profit from falling prices. Fear is the most powerful force in the stock market and it must be traded much differently than "greed"–which is in action when prices are rising.
Although the broad market is still within its uptrend, the two underperforming sectors, social media and internet, may continue to sell lower. Once the broad market rolls over, these sectors should fall even faster to the downside. Until then, they could chop around and grind their way down.
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