Stock Leadership Being Tested
Amazon and Alphabet – 2 important generals of the market rally – are undergoing similar tests of their uptrends.
Over the past week, we’ve seen the stock market tested moreso than any other point since the post-election rally kicked off. Some of the recent laggards, like small caps and value stocks, have suffered breakdowns to some degree. Even the leadership areas of the market have not been immune to challenges of their own. For example, 2 stocks in particular – Amazon and Alphabet (Google) – veritable 4-star generals among the leadership ranks, are undergoing similar tests as we speak.
First off, let’s look at Amazon (AMZN), which is up an astounding 200% in just over 2 years.
If we draw a trendline (on a log chart) since its January 2015 launch point, connecting the February 2016 low and the low at the turn of this year, we find it presently intersecting near the 838 level. That happens to be where the stock opened yesterday into the early morning selloff on Wall Street. After dipping to as low as 833.50, the stock rebounded to successfully hold above the trendline.
Next up, we have Alphabet (GOOG), formerly Google (still have a hard time adjusting to the new name). Like Amazon, GOOG has been on a tear since 2015, rising more than 60% since July of that year.
Also similar to AMZN is the Up trendline that has defined GOOG’s advance over the past 20 months (also on a log chart). Its rally has advanced along a line connecting the lows in July 2015, June 1016 and November-December 2016. The latest location of that line is in the vicinity of the 806 level. In yesterday’s opening weakness, GOOG opened at 806.95. Like AMZN, the stock would briefly dip below the trendline before recovering to close definitively above the trendline.
So the leaders have passed their respective tests…for now. While that perhaps bodes well for the near-term (indeed, they showed some follow-through today), we would say that they – and the broader market – are far from being out of the woods. There are a number of immediate-term concerns that we have still, as well as a great many longer-term concerns. Those apply to both the overall market as well as to leaders like AMZN and GOOG. Regarding the leaders here, in particular, we have identified the levels, and the structure by which we would be compelled to jettison the leadership tag, and also adopt much graver concerns.
However, for the moment, as long as the leaders continue responding well to these tests, the market should be compelled to follow their lead – in general, to the upside.
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Disclaimer: JLFMI’s actual investment decisions are based on our proprietary models. The conclusions based on the study in this letter may or may not be consistent with JLFMI’s actual investment posture at any given time. Additionally, the commentary provided here is for informational purposes only and should not be taken as a recommendation to invest in any specific securities or according to any specific methodologies. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.
