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Our good friend Tom Lee is always an optimist, but he has many good reasons why he thinks this could happen. He believes the stock market will soon go up sharply, now that some of the bad news is behind us and some of the uncertainty has disappeared from the market. This is what the market hates the most.
But when I look at the S&P 500 chart, I only see lower highs since August's all-time high. But John, if someone came to you and asked your opinion on what would happen to the stock market next, what would you tell them? So, first, here's "Mag 7." This is an ETF representing these companies. And you see that we have an ascending wedge here.
This is usually seen as a bullish trend continuation signal. Provided you get a confident breakout of this wedge. But if the breakout attempt fails and the price returns inside the wedge, then this is a kind of sign of a failed auction, indicating that buyers are exhausted. We're right on that line now, aren't we?
We don't know what will happen. But if the market were to roll back, say, and fall below the $69 mark on this chart for MAGs, the Mag 7 collection, then I think that would be a cause for concern. This inability to break through and this exhaustion of buyers. Well, let's look at the...bigger picture.
So here's what I did: I took our stock screener and filtered out the Russell 3000 , which covers about 95 % of all the stocks we trade. And I asked the screener: " Look at our trend search indicator." If you're not familiar with our proprietary trend indicator, it's essentially a 50-day tool, there are other things in there, but basically it compares the price to a 50-day moving average.
And you see on the right that over 1,700 of the 3,000 companies in the Russell 3000 have a sell signal from the trend indicator. In other words, they are showing bearish momentum. This numberโI looked at it earlier in the week, it was just above 1,600. So we're talking about almost 60% of Russell stocks that are in bearish momentum.
Not necessarily bear territory, just, you know, momentum, that's all. If we look at the S&P, let's now flip a coin. So, I filtered out the S&P and looked at those companies that have a buy signal and a 100% rating on the Barchart scale. If you are not familiar with the Barchart rating, we evaluate 13 technical indicators: short-term, medium-term, and long-term, as well as their overall interpretation.
So if they all have a bullish sentiment, you get a rating of 100%. 38 of the 500 companies in the S&P 500 have such a โbullishโ sequence. And that's what we're seeingโthis concentration. We've seen this before, this concentration in some high-tech stocks or stocks that have positive cash flow. And that worries me a little, does n't it?
I mean, leadership is very limited. We have already seen in the past that the market can continue to grow, right? So let's look at some graphs. This is where you see the Qs. Remember, this is mostly a technology sector . This looks like a "flag" to me, doesn't it ? A small โbull flagโ and we got a small breakout here.
We don't see a strong continuation right now, although we are higher today than yesterday, and definitely higher than Wednesday. But we are hitting our nearest resistance level or recent local high. So I would really like to see Qs rise above the 722 level. Notice that we have a small gap here. So, this is something we have to take into account.
And if I look at the S&P, I think that's exactly what you're talking about. Here's what I did: I applied the ZigZag indicator, Thomas . And I look at the changes between local highs and lows when they exceed 1 ATR. And you can see what you actually mean , right? We are forming a series of lower lows and lower highs, which is a sign of a downtrend .
But we are right near this recent high, which is around 7650. We are literally knocking on that door today. But I agree with you. I think I can't say that everything is fine, as Tom Lee would say, until we get above that, you know, other high here. We see it being around 7750. Then I would be much more confident in Tom Lee's prediction that we will see something like 8200 by the end of the year.
But, Tom, what comes to mind is what really drove the market, and again, it's corporate profits, right? Corporate profits are actually, you know, er, great, right? And these capital expenditures, which seem to last forever, but there is an analogy from sports: winning cures all ills, or, in other words, hides shortcomings.
So, as long as we continue to see that, I think we'll grow. But if you change the underlying factors, shake that "snowball" and see something that can change, say , the corporate earnings forecast, then I think the story will be completely different. For example, for the S&P, if we fall back below, say, 7600, then I think we will see a retracement to the mean, and the mean here is the 200- day moving average, which is roughly 7250โ7230.
Somewhere around 7180. So, that's my opinion. I know this sounds a bit uncertain, but until I see more solid evidence, I'm inclined to just wait and see what happens next.
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