Technology stocks just flashed their first sell signal since just before the market peaked in November 2021
- The Nasdaq 100 just flashed a "sell" signal for the first time since November 2021, according to Fairlead Strategies.
- The sell signal suggests the stock market will soon roll over, leading to a return of strength in defensive sectors.
- Outperformance in utilities and health care stocks "would be naturally associated with the next market downdraft," Fairlead's Katie Stockton said.
The Nasdaq 100 just generated a "sell" signal for the first time since November 2021, which was just a few weeks before the stock market hit its peak.
That's according to Fairlead Strategies' founder Katie Stockton, who told clients on Tuesday that the implications of the sell signal could lead to an imminent decline in the broader stock market.
The sell signal was generated on Monday via the Tom DeMark Sequential indicator, which generated a counter-trend "13" sell signal.
The DeMark Indicators help technical analysts measure the supply and demand of a given security and have been known to highlight important inflection points in price trends. The indicators are commonly utilized by various strategists on Wall Street.
"Past signals have been fairly timely," Stockton told Insider on Tuesday. "The implications of the '13 sell' signal are for a two-week pullback in the Nasdaq 100, but sometimes they yield more lasting reversals."
The sell signal comes as mega-cap tech giants take a breather from their recent rally, which essentially powered much of the stock market higher given that Microsoft, Apple, Amazon, Nvidia, and Alphabet collectively represent about 40% of the Nasdaq 100.
As those mega-cap tech giants falter, more defensive sectors which have floundered since the start of the year are starting to perk up, signaling that a potential rotation among investors out of risky stocks and into more stable companies is materializing.
"Technology and communication services [stocks] pulled back in relative terms and that's something we expect to persist in the near-term. Looking longer term... we'll see more defensive sector rotation to the benefit of the likes of utilities, consumer stables, and health care, and that would be naturally associated with the next market downdraft," Stockton told clients.
Such a drop makes sense given the sharp rebound in tech stocks so far this year, with the Nasdaq 100 up about 15% year-to-date, which is five times the gain seen in the S&P 500 over the same time period. Shares of Nvidia are up 79% year-to-date, while Amazon and Microsoft are up 15% and 14%, respectively.
Stockton highlighted that the Nasdaq is likely to face stiff resistance around 12,850, which represents about 10% upside from current levels. That level should essentially cap the Nasdaq's upside for the foreseeable future.
Meanwhile, the Nasdaq just fell below its initial support of 11,776, according to Stockton, paving the way for longer-term support of about 10,600 to be tested. A decline to that support level represents potential downside of 9% from current levels.
The sell indicator "does support short-term weakness here and it suggests that resistance of roughly 12,856 for the Nasdaq 100 will remain intact. That would suggest the mega caps continue to struggle after yesterday's weakness," Stockton said.
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