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May 19, 2014

Trouble at the Top

Leadership Stocks Warn of Bear Market

Leadership stocks have been displaying a curious divergence from broad market action. Shares of Google, Amazon, and Priceline, among others... all of which have enjoyed strong uptrends over the course of a 5-year bull market... are showing signs of trend change even as the S&P 500 flirts with new highs. Let's begin with the elephant in the room, Google:

The red and green lines on the chart represent a proprietary indicator I developed which I dub TrendBands. The details of TrendBand interpretation can be found in the Member Letter, but for our purposes here, keep in mind that a close below the LowerBand confirms a downtrend.

The shaded areas in the chart represent where the general stock market formed a weekly cycle low. You will observe that Google's declines below the LowerBand coincide with general stock market corrections. However, as noted above, Google's 2014 decline has occurred with the stock market trending higher. A similar pattern can be seen in Amazon:

Amazon shares are now 25% off their peak while the S&P 500 threatens to break to new highs.

This phenomenon is not limited to individual companies. The biotech sector, arguably the leading sector of this bull market, is also showing signs of trouble.

Biotech has just suffered its strongest correction since 2011, doing so without the commiseration of general equities.

Obviously, I have cherry-picked a few charts here, but these charts do represent leading equities and sectors. My equity cycle analysis suggests that stocks will rally into at least mid-summer. If these leading shares do not manage new highs during such a rally, we will have negative divergences on important charts, possibly indicating the end of a cyclical bull market.

 

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