Tech Stocks Weakening

There is a widely held belief about stock market breadth being a leading indicator of market direction.  The more stocks that are going up, the better it is for future market performance.  I've looked at a lot of these studies, and they don't work well for predicting a medium to long term top or bottom.  They are hit and miss.  It basically assumes that small cap stocks lead the market, which is sometimes the case, and sometimes not.  However, what does seem to help predict market direction is the tech stocks, or basically the Nasdaq 100 index. 

So far, the Nasdaq 100 has been outperforming the S&P 500 this year, and basically every year since 2009.  But in a somewhat rare situation since 2009, the Nasdaq 100 is actually lagging the S&P 500. 

Over the last 5 years:

Over the last 3 months:

As the uptrend was building, the Nasdaq 100 outperformance over the S&P 500 was also growing, but over the past few weeks, that has changed to an underperformance, even before Facebook plunged after earnings.  Since then, the underperformance has only grown. 

Considering the high expectations built into the valuations of the FANG stocks, and the difficulty of growing strongly with such big market caps, expect more earnings disappointments in the future.  Similar things happened in 2000, when the big cap Nasdaq stocks just couldn't sustain their earnings momentum due to growing expectations and law of large numbers. 

Apple reports after the close today, so it will be interesting to see how tech stocks trade afterwards.  The put/call ratios have been elevated the last 2 trading days, a bit more than one would expect considering the mild down days.  After hearing Brian Kelly on CNBC Fast Money yesterday, it seems like there are still very few worried about the market having topped out, especially considering the "good" news on trade we got from the US/EU meeting last week.  Yet the USD/CNY keeps going higher.  This market is getting dangerous, entering a period of weak seasonality over the next 3 months.