Bubblicious Toppy? DIA & IWM rolloff

Intro

In an earlier posting, I looked at some currencies and at which parts of the market had the most evident “action” and asked if semiconductors in general (and NVDA in particular) were propping up the S&P 500 and NASDAQ (QQQ).

https://chiefio.wordpress.com/2024/06/10/some-thoughts-on-currencies/

In this posting, I’m going to ask if “Minus those, has the broad market rolled over?”.

In particular, looking at DIA the Dow Jones “30 Industrials” (that now includes banks…) and the IWM (a Russel 2000 broad small cap fund) and asking if they look “Toppy” and maybe the broad market has started to roll over, while Semis are holding up the QQQ and SPY?

Essentially: Is a “bubble” in Nvidia keeping QQQ and SPY artificially rising when a broad market roll over is already in progress?

I intend to do this by looking at two charts, detailing DIA & IWM, but with QQQ and SPY lines for comparison.

“In the news” we’ve had a fair amount of “worry” about the status of Banks. Largely due to a big level of Commercial Real Estate in distress.

https://chiefio.wordpress.com/2024/06/05/well-thats-not-good-unrealized-losses-exceeding-reserves-mortgages-cre/

The “Dow 30 Industrials” is no longer a list of Industrial stocks. More a mixture of Big Retail with Big Banking and a few other Big Companies.

Retail: Walmart, Amazon, Home Depot, Coke, McDonald’s, Walt Disney.
Banks: American Express, Goldman Sachs, JP Morgan Chase, VISA.

Yes, it has a lot of other stuff, too, but much of it is tied to retail, like Nike and Procter & Gamble.

Essentially, my thesis here is that it is now largely indicative of General Market Conditions, and not just industrial production. The Dow Theory compared actual industrial companies to transports and the expected lag time between orders being placed, goods made, and stuff shipped. That can’t be done with the present “Industrials” average. But perhaps it CAN indicate a general “worry” level in banks, retail, and the overall economic condition / attitude.

So here’s the chart:

14 June 2024 DIA vs other indexes 6 month daily

FWIW, I don’t know if it is a Chrome thing, or WordPress, but where before I could “Click to embiggen”, now a click gets a smallish graph and I must scroll to the bottom to find a “click for full sized” choice. So while YMMV, realize you can (somehow) embiggen these graphs.

Things to notice on this chart: QQQ The NASDAQ / Tech index fund and SPY the S&P 500 largest companies in America are both rising well. QQQ is the top orange line and right below it is the blue S&P 500. But when we look at “what’s big in America today?” we find it dominated by a few giant tech companies, making the difference between the S&P 500 and the QQQ ever smaller as the massive growth in Tech Capitalization (I.e. money running into tech shares and inflating them) has lead to domination of both averages by a few giant companies an ever bigger issue. Apple, Microsoft, NVIDIA lately, Google, etc. BUT those companies are NOT the broad economy.

Now look at the two lower lines. DIA Dow 30 “Industrials” is the main ticker here, and IWM, the Russel 2000 small caps, is the raspberry line dancing with it. There’s 3 lines of SMA (Simple Moving Average) stack in there too: The green, black and yellow thin lines.

So, first off, the DIA and IWM are almost the same. What the? The 30 BIGGEST and the 2000 small sized are both acting the same? While SPY & QQQ diverge. A lot. My guess here is that Banks and General Companies of a smaller sort are both in a bit of trouble.

There’s massive closures and failures in Retail at the moment. Largely in Blue Cities and States where companies are closing down outlets as fast as they can and running away from bankrupting things like $20 minimum wage for burger flippers and “steal all you want” laws / DAs. Then EV Mandates looming and painful price jacking has made the whole car industry grind to a halt. This, plus ‘work from home’, is putting huge losses and pressures on banks (regional, local, major, etc.)

Basically, just WHO is making any money right now? Eh? It comes down to Amazon, chip makers and a few select retail product makers like Apple. That does not a broad market make.

Now look at the SMA lines. They have converged into what I call a “topping weave”. In rising markets, the fastest SMA line is on top, the slowest on the bottom. (invert that for down markets). At the transition where they begin changing places, they weave together.

The Dow price bars show two tops in end of March and mid May, of about the same height, then it rolls off to a “lower high” in early June. “Failure to advance” often indicates a top. Looking at Vol+ we see that volume tended to dry up at the two little tops in late May early June. I tend to call this “two eyes” in the charts as the “two volume drop outs”, with a high in volume spike as price heads to the downside in between, make two holes under the average line. This also often happens at tops. Volume dries up to the upside, but is found to the downside as sellers get scared out of positions in a falling trend. Then look at the price bars themselves at those two attempts to advance. They get very short at the local tops, but big to the downside on down days. People not paying up for the up runs, but selling at whatever price on down days.

Moving down to MACD, we find it dropping under the zero line and with “red on top” – typically indicating more down from here to come. Then the DMI / ADX indicator. ADX is the strength of moves, DMI+/- is the direction. We’ve got strength just gone as the black line is approaching about 10, and it is ambivalent in direction with red / blue DMI lines weaving. Also what a top looks like. (Rises have strong ADX with blue clearly way on top, falling markets also have strong ADX but with red way on top.)

All this looks like banks, retail. and the rest of the 30 “Industrials” are weak toppy, and looking to continue falling from this point.

What about the IWM 2000 smaller companies?

14 June 2024 IWM vs other tickers 6 month Daily

It looks almost the same. Only real difference I noticed is that the volume drying up to the upside starts back at the March high, and the ADX/DMI looks to have died about a month earlier than for DIA.

So IF the biggest AND the small are both looking “on the rocks” and rolling over, why are QQQ and SPY still rocket rides to the moon? As I noted earlier, I think it is all down to NVIDIA and maybe a couple of other tech companies. Is a “Tech Bubble” enough to keep markets going? Anyone else remember the last Tech Bubble and how that ended (to the downside…).

SO, OK, today I bought a small bit of QQQ and NVDA. Not enough to hurt me if it too rolls over; but enough to have me focus on it daily. I’ve not (yet) bought any RWM or TWM (the “short Nasdaq” and 2 x short funds), but my intent is to do that “soon” once the “Toppy” starts to resolve into a “Yes, it is down trend now”. That would have me using the weaker stocks as a short while I decided if I ought to exit that hedge by selling my SPY and such. And eventually exiting the QQQ and NVDIA when they look Toppy.

But generally there’s more time to ride a bubble than you expect (so I’m in the trade); but one needs to start planning the exit… For me, that’s a late stage “ride the bubble” but an early stage “identify the short for the hedge”, and look closely daily so you are not late to the exit “when the time comes”.

At least, that’s the way I see it. (worth all you paid for it, not financial advice, your decisions are yours to make, I’m sometimes wrong, I’m just “some guy” reading tea leaves in charts to guess economic actions by others, this is what I’m doing for me, not me telling you what you ought to do for you, etc. etc.)

UPDATE 15 June:

I’m adding a chart of RSP, the equal weight S&P 500, for comparison (see comments for why). IMHO it looks a LOT like the DIA and IWM charts indicating a broad “roll over” Toppy character and confirming the thoughts about Tech Bubble distortions in the cap weighted S&P 500:

RSP eq. wt. S&P vs mkts & shorts 14Jun2024 6moD