Clear, Plainly Evident Negative Divergences Expand Further As Nutty Rally Of Crazed Hot Money Enters Bubble Territory

Commentary and price chart analysis

The amount of drama in the eventual selling will be equal to the amount of hype that created the bubble.

That’s the thing about a rally based on a belief in what’s hyped as “the next big thing!” or “this is the tech that changes everything we know!”

That belief in the promise of the wonder of what’s yet to be is the same basic material in any of the cycles of mad buying and one of those cycles has come around again.

No one wants to believe that the other side of the cycle is a painful dashing of the dreams, and it comes with the finality of unmistakable loss.

In the meantime, it’s a dreamy, beautiful going-to-the-moon feeling that grips venture capital billionaires, Wall Street money managers and those who’ve allowed themselves to become glued to CNBC and the parade of “experts” appearing so cheerful and delighted.

Since the S&P 500 and Nasdaq 100 price charts are so widely seen what with the “new highs” extravaganza, let’s view the deepening issue of negative divergences.

Here’s one look of the breadth problem: the number of advancing issues versus the number of decline issues:

Every time the major indexes establish the “new highs,” this key chart shows the underlying shift of the tectonic stock market plates, now in pre-earthquake mode.

The December peak is lower than the November peak. The previous February peak is lower than the November peak. This week’s peak is lower than the earlier-in-the-month peak.

Sellers are using the headline story to unload other stocks beside the handful of favorites. It’s as if a beautiful building has been constructed and your eyes are directed at the shiny features near the top while, meantime, the lower beams and girders are being knocked apart, steadily.

Here’s the weekly price chart of a hot concept stock that promised a new era in the patient/doctor relationship, Teladoc. The idea was to skip in-person visits in favor of appointment by laptop or mobile device — no need to make the long drive to the doctor’s office and wait in the lobby.

As the pandemic crisis unfolded in 2020 and just after, the stock attracted an almost cult-like following and outperformed like crazy:

The hot concept stock, New York Stock Exchange-traded, peaked at $300 in early 2021 and then began the relentless decline back to reality. It now trades for $14.50.

Teladoc is just an example of the phenomenon. It’s relatively easy to find stocks that have seemed to be herald new times only to disappoint eager investors.

The “this time is different” crowd — now underpinning the artificial intelligence-related big cap tech and social media names — may be right, of course. It may be that a tiny group of Nasdaq 100 stocks quickly benefit and hold the gains.

The problem is: I’m not seeing too much caution. Hardly any, in fact — and the breadth charts strongly suggest unrecognized or ignored issues.

In my next report, I’ll identify and comment on the other issues that seem to have faded into the background.

Not investment advice. For educational purposes only.