This article is written exclusively for Investing.com.
The stock market has seen a change in the tides. It now takes into account the possibility that the winding-down process will end earlier and interest rates will rise faster. Things are faltering as the stock market begins to ponder the implications of a more aggressive Fed. As a result, the NASDAQ is showing severe cracks below the surface, suggesting that the bottom is poised to fall out.
It is difficult to see the cracks forming if you only look at the and the . But the NASDAQ Composite saw the number of stocks making new lows rise, while the percentage of stocks trading below their 200-day moving average fell as the index hit new highs.
Changes in the Fed's stance from ultra-moderate to a less moderate stance could also have a significant impact on the index's performance. Even the release late Wednesday indicated that the Fed is considering phasing out its asset purchases at a faster pace. In addition, Fed fund futures are now forecasting the first rate hike, possibly as early as May. This is causing Treasury yields to skyrocket, suggesting that the market is also beginning to estimate the likelihood of the Fed winding down faster than planned.
New lows surpassing new highs
This has led to some uninspiring performance in the NASDAQ Composite in recent weeks. Most notably, the number of stocks making new lows is greater than the number of stocks making new highs.
On November 23, there were 424 more new lows than new highs. That difference was the lowest since the Covid crash in March 2020 and before, all the way back to the winter of 2018. But on those points, the NASDAQ Composite was well above its peak and still hasn't traded on it.
NASDAQ New highs and new lows
Percentage of stocks below their 200-day moving average NASDAQ Composite is around 34%, a low level. This could indicate that most stocks in the NASDAQ are no longer trading in a long-term uptrend. This very low value is not usually associated with a composite that is near its highest point ever.
NASDAQ percentage of stock above 200 DMA the NASDAQ is steadily falling. Historically, a diverging line of forward decline in the broader index is a bearish reversal signal.
However, there is one positive point for the bulls. The current decline in progress resembles that of 2014, when it took until the summer of 2015 for the NASDAQ to fall lower. So a forward decline line that peaks in early 2021 may not indicate that the NASDAQ rally is over.
NASDAQ Advance Decline Line
However, it does tell us that the underlying well-being of most members of the NASDAQ Composite is not healthy. Most stocks in the NASDAQ Composite seem to be struggling, and fewer stocks seem to lift the index higher. While this pattern may indeed continue, it would indicate that this current rally is likely to be on vapor or, at best, in the very late innings of its life cycle. Some decline is likely needed to reset the bull market and resume the longer term uptrend.
