Trading Desk: Not A Lot Of Support For A Top-Heavy Market

When stocks are at best going sideways (and 82% of the S&P 500 is down in the past month) the ability to read a chart becomes more important than ever. And a lot of extremely prominent charts belong to the bears right now.

We’re talking about support and resistance. For a lot of commentators, these are fairly arbitrary numbers that reflect feelings, hopes and fears around how far a stock can foreseeably rise or fall.

My use of the terms tends to be more objective and tangible. It’s rooted in statistics. When a stock’s recent past suggests that it’s statistically unlikely to drop below a certain level, that’s where “support” is.

As of yesterday, very few of the gigantic companies that dominate the S&P 500 have support on their side. There’s very little floor beneath them . . . not a lot of statistical “net” to interrupt their fall.

Today made it even worse. At this point, 16 of the 20 biggest stocks on Wall Street have cracked the floor, setting the stage for worse losses ahead before they can even contemplate a convincing recovery.

This doesn’t prevent any of them from bouncing next week under the right conditions. The “random walk” doesn’t require support for that. But if the next leg points down, there’s a long way for these stocks to fall.

Think of it as a kind of market gravity. A falling object will fall until something gets in its way. Normally that’s support, which reveals what buyers have been willing to pay for a given stock.

When support fails, those buyers have disappeared. Maybe they ran out of cash. Maybe they’ve given up. Either way, an absence of buyers leaves the sellers in control.

And when you’re talking about 16 stocks that collectively account for 33% of the S&P 500, leaving the sellers in control of chart after chart doesn’t bode well for the market as a whole.  This is Apple (AAPL) and Amazon (AMZN), Microsoft (MSFT) and Alphabet (GOOG). It’s also Meta (META) and NVIDIA (NVDA).

They’ll fall until they become irresistible. For a company like META that’s already trading below its COVID crash bottom, I don’t really know where that point will be. That stock looks eager to retest its 2018 low . . . reversing what’s left of five years of hard work and shareholder gains.

The other members of the Big Tech club have held onto significant progress, but it’s an open question what it will take to make the buyers catch their falling knives. AMZN is now only 4% above its pre-COVID peak. GOOG and MSFT, on the other hand, are still 25-30% from that point, which means there’s room to fall before they catch up with the online shopping giant.

But this is more than Big Tech. TSLA has broken all support levels. So have Old Economy stalwarts from Berkshire Hathaway (BRK) and JP Morgan (JPM) to Walmart (WMT), Procter & Gamble (PG), Johnson & Johnson (JNJ) and the global credit card networks.

I had high hopes for UnitedHealth (UNH) holding near-term support, but today pushed it back to the final line, the 200-day trend. If that floor doesn’t hold for one of the most defensive healthcare conglomerates in history, the rest of the market doesn’t have a chance.

As it is, the scattered bright spots are going to have trouble keeping the index up. They’re just too few in number and too small, even in the aggregate, to defy the undertow.

We’re talking about a handful of names this high up the food chain: Exxon (XOM) and Chevron (CVX), Eli Lilly (LLY), Home Depot (HD). They have support, but the four of them add up to barely 1/10 of the market capitalization of the other big names I’ve mentioned.

If the big names stumble, index fund investors aren’t going to feel a lot of comfort whether Big Oil and Big Pharma hold up or not. (The next member of the S&P 500 with even short-term support on its side is Merck (MRK), not even 1/10 the size of AAPL on its own.)

There’s a moral here: don’t look for a lot of love from broad-based index funds right now. Because they’re pointed down without a lot of parachute to deploy.