The Stock Market Could Drop. Here’s Why.

The “risk on” environment is clear with new highs for the Standard and Poor’s 500 and for the Nasdaq 100, but a correction could easily dampen the enthusiasm at just about anytime. You know it’s back to intense “risk on” when the financial media discussions return to “the Bitcoin
BTC
ETF” topic, as we’ve noticed lately.

That stocks have travelled upward off of July lows (for some sectors) and late October/early November lows (for other sectors) is good news for investors except that a healthy correction — or even a decent sell-off — might be in order for the longer-term health of the market.

Stock Market Bearish Indicators.

Take a look at the daily chart for the volatility index:

It seems to have bottomed in mid-December, bounced a bit and late last week headed back downward. This is the “fear index:” when it’s down in the lower range of the chart, that means “not much fear” and that’s where things sit. The volatility index is remaining in the overconfidence stage — or, as it sometimes referred to, the “risk on environment.”

Here’s the weekly chart for the volatility index:

It hasn’t been this low, so steadily, in years. The red dotted line shows the previous low as measured in June, 2021 at 15. When stocks fell in October of this year, the index jumped to about 22 and with the rally since then, has dropped to as low as 12 before rising slightly.

To be sure, this fear gauge could stay low for longer than anyone expects. Trending markets can be deceptive and cruel, but it’s clear that lack of fear has become more and more entrenched for late in 2023.

Here’s a look at a chart showing the percentage of advancing issues versus declining issues for the benchmark technology ETF, the Technology Select Sector SPDR Fund, that closely tracks the Nasdaq 100:

The red dotted lines show the negative divergence between a steadily up trending price chart and a steadily down trending advance/decline percentage. The clear difference between the 2 shows how many stocks in the tech group are failing to participate in the rally. This is likely the result (among other factors) of heavy investor interest in the select 7 of the Nasdaq 100 — Alphabet, Amazon
AMZN
, Apple
AAPL
, Meta, Microsoft
MSFT
, NVIDIA
NVDA

DIA
and Tesla
TSLA
— to the exclusion of others in the sector.

One of the 7 that helped the tech indexes reach highs in July is no longer helping out: Tesla. Here’s the daily price chart:

While the other big cap tech and social media names are above or close to the summertime highs, this one is holding down the Nasdaq 100. Further downward movement might begin to quell the enthusiasm about the continuation of a stock market rally.

When favorites fade, the vibe can have a tendency to spread.