Weakening Asset Flows Into Tech Warn Of A Deeper Decline

Conclusion, Investment Implications, Strategy

Our tactical models (Asbury 6, Correction Protection Model) have identified theUS stock market’s current level as a pivotal one, from which its late March advance must resume if still valid.  Recent investor asset flows into large cap Technology stocks, however, which have driven this rally, are indicating a lack of conviction in higher prices. Unless this conviction picks up, and quickly, the market-leading NASDAQ 100 will likely break critical support near 11,069 and begin a corrective decline.

Introduction

Two days ago, on Sep 8th, the Asbury 6 shifted to a Negative status to indicate market internals had turned bearish. As of the close yesterday, Sep 9th, Table 1 below shows the “A6” has shifted back to an equally-balanced three red and three green — although still retaining its Negative status.  (Four green constituents would be necessary to move the model back to a Positive status.).

Table 1

Meanwhile, the Correction Protection Model (CPM) still retains its Jly 6th Risk On status. 

Our Models Indicate A Tactical Inflection Point

The fact that the A6 has turned Negative while CPM is still Risk On indicates that, from a market internals standpoint, the market is in balance and at a Tactical inflection point from which its next one to several month directional move is likely to begin.  More specifically, this is where the current late March must resume if still valid and intact.  Put another way, if the uptrend can’t resume here, then this is where the next corrective decline will begin.

Watch Key Support In NDX

The next step is to attach a hard price level to this apparent inflection point.  Since big-cap Technology has clearly driven the current rally, we are looking for that price level in the NASDAQ 100 (NDX).  Chart 1 below plots NDX daily since February and shows that the index is currently testing, and thus far is holding above, minor support at 11,069.  This level represents the Jly 13th benchmark high (green) and the 50-day moving average (widely-watched minor trend proxy, blue).  This is the key level we are looking for.

Chart 1

The next thing we want to measure is investor conviction.  That is, how convinced are those with real money in the game that the Apr 14th minor advance in NDX, as defined by the 50-day MA, is still intact?

Lack Of Investor Conviction Is A Red Flag

Chart 2 below plots NDX daily since May in the upper panel, with the corresponding total net assets invested in the Invesco QQQ Trust (QQQ, blue) and their 21-day moving average (red) plotted in the lower panel.  The 21-day MA identifies a monthly (our Tactical time period) trend of expansion or contraction in these assets.

Chart 2

The green vertical highlights between both panels show that successful tests of the 21-day moving average by these assets on Jun 26th, Jly 24th, and Aug 11th coincided with near term bottoms in NDX, and the resumption of its upward.trend.  The rightmost red highlights, however, show that these assets have declined below the 21-day MA as of Sep 7th. 

This means, even though NDX has thus far held minor support as shown in Chart 1, that rebound has not yet been confirmed by investor asset flows.  And, since asset flows drive — and often lead — price direction, the longer the total net assets invested in QQQ remain below their 21-day MA to indicate a trend of monthly contraction, the more likely that this week’s rebound from NDX 11,069 will fail and this market-leading index will begin a corrective decline.

Finally, NDX and the benchmark S&P 500 (SPX) have maintained a very tight and stable positive correlation to one another throughout the past 30 years, most recently an essentially lockstep 0.93 over the past 3 months.  Per the correlation, as goes NDX from here so is likely to go the US broad market.