Last week, both investors and traders were feeling apprehensive after the Nasdaq Composite Index experienced a 5.5% decline, its largest since November 2022. The high-profile NVIDIA Corp. also saw a 10% decline on April 19th, causing concern among stock market bulls and reinforcing bearish sentiment. However, technical analysis suggests that corrections in a bull market or rallies in a bear market serve to shift market sentiment and create an environment for the prior trend to resume.
Data from S&P Global showed that US equity investors’ risk appetite declined from 14% in March to 5% in April, reaching a three-month low. Additionally, sentiment data from the American Association of Individual Investors (AAII) indicated a decline in bullish sentiment, with the bullish percentage dropping from 51.7% in March to 32.1% in the latest survey. The decline in bullish sentiment could potentially fuel the next market rally.
The Spyder Trust (SPY) weekly chart suggested that the market could be nearing a low, as it closed just above the 20-week EMA. The S&P 500 Advance/Decline ratio has also moved back above EMA, reversing the negative signal from the previous week. Furthermore, the ratio of iShares Russell 1000 Growth ETF to iShares Russell 1000 Value ETF showed growth stocks leading for most of 2023 but shifting to value stocks in early 2024. However, last week saw growth stocks leading once again.
Historical analysis of growth and value stocks over the past twenty years has shown the importance of the growth/value analysis in identifying stock market peaks and trends. Growth stocks led the market in the early 2000s, but value stocks took over in the lead up to the 2007-2008 bear market. The current ratio of growth to value stocks is still in a downtrend, favoring value over growth in the near term.
Technical analysis of the Invesco QQQ Trust (QQQ) showed the importance of key resistance levels and moving averages to watch for potential market shifts. The Nasdaq 100 Advance/Decline line needs to move above specific levels to indicate that the correction is over. The stock market saw a sharp drop early in the week on a weak GDP report but recovered throughout the day, leading to a positive outlook heading into the PCE report on Friday, which justified new buying.
A positive close this week could signal a shift in previously bearish outlooks, but it may take time for bullish sentiment to significantly rise. Monitoring A/D lines and key technical levels will be crucial in determining the market’s direction in the coming weeks. If market conditions remain positive, it could lead to a test of recent highs, but negative A/D numbers early in the week could signal a retest of recent lows.
