QQQ: Failed Breakout Watch II, Semis Under Pressure

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Two weeks ago this morning I led with “QQQ: Failed Breakout Watch” (Top Gun Financial, Wednesday 4/21). Well, yesterday the QQQ broke down below its February 12, 2021 closing high of $336.45 to close at $330.14. This is especially noteworthy given last week’s “Blowout Big Tech Earnings” (Top Gun Financial, Thursday 4/29). This is important: When a stock or security can’t rally on good news (really great news in this case), it suggests that it’s all priced in already.

Let’s delve in a little deeper by taking a look at the post earnings action in Apple (AAPL) and Amazon (AMZN), starting with AAPL. Here’s what I wrote about AAPL earning last Thursday morning:

AAPL reported a monster quarter with Revenue of $89.6 billion and Net Income of $23.6 billion or $1.40/share. Those numbers are +54%, +104% and+128% compared to 1Q19. 

AAPL reported a truly spectacular quarter Wednesday afternoon and yet, if you look at the chart above, it is trading significantly lower than when before it reported! This is what poker players call a “tell”: If AAPL can’t rally on the best news possible, what would cause it to rally? No matter how high quality a stock is, there comes a time when all the good news is priced in and investors are not willing to pay higher prices for it. The action suggests that’s where we are with AAPL – at least for now.

The same kind of analysis applies to AMZN. Take a look at my tweet above from Thursday afternoon for a breakdown of AMZN’s 1Q21 earnings. Like AAPL, they were superb and the first reaction was a big move higher at the open on Friday. But, again like AAPL, it did not hold and we are now significantly below where we were pre-earnings. The same analysis applies here: If AMZN can’t rally on this report, what could possibly cause it to rally?

The second most important ETF in Tech is probably the Semiconductors (SMH). We’ve all heard of the semiconductor shortage by now and these stocks were widely expected to continue rallying based on the strong demand for their products. Instead, they have broken down with the SMH closing below its 50 DMA on Monday and following through on that move yesterday.

With tech making up ~26.5% of the S&P and the two most important Tech ETFs showing some serious, and surprising, weakness, the entire market is at risk at the moment. I am quite happy in my boring, safe, high quality consumer staples like Walmart (WMT), Procter & Gamble (PG), CVS and Kroger (KR). We might not be getting rich overnight but at least we’ll avoid losing a bundle fast in a highly speculative market.

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