Exiting A Parabolic Move is Good News for Investors

April 3, 2024No Comments

Great News!  A Parabolic Move is on the Horizon.

 

Today, I have some good news for you. For those of us who have been a little dismayed by the rather [00:00:30] parabolic move by the Mag 7’s (and many of the other tech stocks out there), take heart! There is some research I’m going to show you today that suggests we are moving out of that parabolic move on the tech sector, and spreading the love by seeing some of the other sectors picking up after a year or more of [00:01:00] drudgery. This is good news for the market. I’m going to show you some evidence as to why those of us who prefer a broad-based market breadth type situation will likely be happy to see a more orderly market coming soon.

So, we’re going to go into a PowerPoint, and I want to start off with a quote. My concern with the Mag 7’s – and really the Mag 7’s are the ‘Mag 6’ now because Tesla has fallen off the map – but my concern with the tech sector, in general, is that [00:02:00] as a group, they’ve made a parabolic move. Bob Ferrell – a famous technical analyst, one of the granddaddies – said that “Parabolic advances usually go further than you think, but they do not correct by going sideways.” [00:02:30] They are almost always correct in a very nasty fashion. 

So, another technical analyst, Brian G from Alpha Charts noted, “Fighting a parabolic uptrend is akin to stepping in front of a freight train. However, stepping aboard this train would also be dangerous.” So, let’s take that concept and look at some recent parabolic move examples. [00:03:00] Now, these are commodities and I want to highlight that the moves of these commodities happened just after the COVID crash. As you may remember, there were supply chain problems if you wanted to build a house, or – you know – eat. [00:03:17]

recent parabolic examples

Parabolic Moves in the Commodities

A lot of the commodities that were used in the production of our day-to-day products and services that we rely on in our economy went through the roof. I’m [00:03:30] sure you remember, it was an in-your-face situation when we went to build a house, buy a car, or whatever it was. So, as you can see, the classic one was lumber. A lot of people talked about lumber. That was on the right-hand side of the chart. You can see the spike and the drop. Again, a parabolic rise is not followed by a nice consolidation period, but instead an outright crash. [00:04:00] You can look at the other three commodities, Wheat, Corn, Nat Gas – they all spiked hard and fell hard. As you have probably seen on a couple of my recent blogs and videos, I’m currently looking at Nat Gas. But whatever the case, these are good examples of Bob Farrell’s rule that parabolic moves do not end with nice orderly sideways periods as they catch up to an orderly [00:04:30] trendline.

 

Parabolic Moves on the Stock Market

So, with that in mind, let’s take a look at historic moves even on the stock market for getting individual security moves. If you go back to before 1987, [00:05:00] Black Monday was in October of 1987, and leading up to that, notice the angle of ascent on the market. Often you get these high angles of ascent. Then there’s a nice orderly move in 2006-2007, [00:05:19] and prior to that, followed by a hockey stick move up. I like to call it the ‘hockey stick move’ because it’s like the end of a hockey stick. There was an uptrend, but then it arcs, [00:05:30] and that usually involves a crash.

a century of parabolic moves

There is the COVID crash. [00:05:36] But, you’ll note that leading into the COVID crash, everybody was talking about the FANG stocks. Some of those are included in today’s Mag 7’s. Not all of them, though – Facebook is not. Let’s take a look at another correction that we’ve seen lately, which was 2022. Another hockey stick moves up leading into that. Well, what do we have [00:06:00] on the right-hand side of the chart?  We’re recording this late March, 2024, and we’ve seen a bit of a hockey stick move over the past few months. If you look at some of the leading stocks – and we will in a second – you’ll see what’s driven that hockey stick. We had a relatively orderly year in 2023, but now we’ve got a hockey stick happening. Remember Bob Ferrell’s rule. Whenever there is a parabolic move, it rarely corrects [00:06:30] sideways.

Okay, here’s the move, but this chart doesn’t really show you the extent of that move. [00:06:40] So, I added a percentage return indicator, which is the right-hand indicator. It’s a tool you can use on stock charts to measure the move between the bottom of this move, (basically late-October ’23 to current), which is [00:07:00] roughly the 24th of March, as I record this. You can see there was a 30% move on the Mag 7, (and this includes Tesla), which actually held it back [00:7:12]. If you looked at Nvidia and the others alone, you would see that this move was actually more than 30% by removing Tesla from the equation. So, this is the Mags ETF which represents those 7 stocks as a group [00:07:25]. That move has been more than 30% [00:07:30] in just 4 months if you take Tesla out. This is a parabolic move. We should be worried about that parabolic move.

current parabolic example

 

Let’s Get Back to the Good News

Here’s the good news. This is a two-month relative strength chart. There are approximately 22 trading days per month if you exclude weekends. So, [00:08:00] if we look at 44 trading days, you see that technology has been an underperformer. When this chart shows a negative, it doesn’t mean they’ve lost money, it means that the technology stocks have underperformed the baseline, (which is the S&P 500) by about 5%, all things considered. So, what has been outperforming? Well, good old-fashioned, boring industrials. [00:08:30] Materials – this is Copper mostly, but other metals as well. Energy – Oil stocks have gotten a bid for the first time in a long time.

S&P 500 SPDRs

If you look at Energy and Materials in particular over the past 6-12 months, you’ll see they were the dog’s breakfast. And even some of these other sectors that are not especially outperforming the market are nowhere near as bad off as technology. [00:09:00] The only one maybe as bad off or worse, is real estate, but we’ll discount that and we’ll just look at the main sectors of the real estate sector of the market. That is a pretty decent distribution, and there are some really strong outperformers. Everything but technology seems to be working. So, that is good news. Why is it good news? We’re seeing rotation in other sectors. 

Here are some statistics coming out of sentimentrader.com. [00:09:30] I like Sentiment Trader because they’re pure quants. They do sentiment work, but everything they talk about is backed by data. And data – you know what they say – [00:09:44] they say that ‘charts don’t lie, and you can only trust what’s in front of your eyes’, so to speak. So, the equal-weight version of the S&P so far, has [00:10:00] had a one-year return of nearly 20%, less than the cap-weighted, based on all those tech stocks. And that’s the widest spread, the widest underperformance by the equal weights since 1958. 

rotation into other sectors is good news

However, as they note here, and you just saw on my performance chart there are some signs of reversing. It’s only been 2 months, but 2 months is 2 months and [00:10:30] we are seeing breadth pick up. That’s good news. Similar behavior has occurred only a few times, but it preceded future outperformance – and here are the keywords – “of the average stock”. So, in other words, if you’re like me, and you don’t feel comfortable piling into that sector, then it’s nice that we should be able to look forward to performance by other sectors. [00:11:01]

Isn’t it exciting that it’s not just one sector that we should be invested in? Common sense! Asset allocation and all that stuff is going to come back to the markets – Hooray! 

So, I wanted to present this short PowerPoint to give you hope. If you are not enamored or succumbing to the pressure of buying into the tech sector like everybody else is, perhaps your time has come. [00:11:31] Perhaps now it’s time to start buying other sectors as the market rotates out of tech and into previously overlooked sectors – as we clearly saw happening over the past two months. Thanks for watching and we’ll catch you next week.

Never miss another video!

Get Smart Money Dumb Money videos delivered directly to your inbox.

Recent Posts

Keith's on Demand Technical Analysis course is now available

Scroll to Top