- Stocks of Microsoft, Intel and Amazon record fresh all-time highs after crushing Wall Street earnings estimates.
- The heavy volume surge that accompanied the rally may indicate a blow-off top.
- If my read is correct, we could see a wider and deeper correction for the stock market.
Last week, many tech stocks jumped in value after crushing Wall Street expectations for the quarter ending December 2019. Among those names that beat consensus estimates were Microsoft (NASDAQ:MSFT), Intel (NASDAQ:INTC) and Amazon (NASDAQ:AMZN). All three tech stocks soared in after-hours trading in response to a strong holiday quarter performance.
— CNBC's Fast Money (@CNBCFastMoney) January 30, 2020
A few days later, the excitement from the earnings beat has dissipated. Amazon, Microsoft and Intel are all struggling to keep their bullish momentum alive. What’s worse, there are signs that a local top is in for these three stocks. If my read is correct, then it might be a sign that the smart money is cashing out.
Amazon, Microsoft and Intel Climbed to All-Time Highs After Earnings Beats
In stock investing, gurus always say to “buy the rumor; sell the news.” As an experienced trader, I’ve seen countless retail investors get suckered into buying the news that’s supposed to ignite a rally. Unfortunately, institutions almost always take that chance to dump their positions.
We’re seeing the same script play out this earnings season. Amazon, Microsoft, and Intel [CNBC] all delivered great numbers that strengthened the fundamentals or the intrinsic value of the three companies. The knee-jerk reaction of investors sent these stocks flying to their all-time highs.
Intel soared to an all-time high of $69.29 after reporting quarterly earnings. It’s the same story for Microsoft and Amazon.
Unfortunately, these names couldn’t sustain their bullish steam. All three stocks immediately corrected. While a pullback can be expected after a rally, the volume that triggered the retracement sends an ominous signal.
Massive Volume Uptick Indicates a Blow Off Top
Investors rely on volume to gauge an asset’s level of demand. Usually, the higher the volume the greater the demand. This rule of thumb has an exception. Exceptional volume at market tops is a bad sign. It often indicates one last mighty hurrah from the bulls [Investopedia].
We’re seeing this development in Amazon and Intel. Amazon surged to an all-time high of $2,055.72 but smart money still took the chance to sell on strength during the same day. Over 15.5 million worth of shares were traded on Jan. 31, a level not seen since October 2017.
I am seeing the same plot when looking at Intel. The stock’s journey to all-time highs was coupled with a significant surge in volume.
Microsoft’s ascent to the top was also accompanied by heavy volume. Instead of a one-day volume uptick, MSFT had two days of significantly high trading volume.
You don’t need to be an expert in technical analysis to see that the rallies were being shorted by the big boys. This is bad news for the entire stock market.
A Deeper Correction Might Be on the Horizon
It’s no secret that the stock market is trading at historical valuations. In addition to that, traders are now concerned about the lack of liquidity as fund managers enter 2020 with the lowest cash levels in ten years.
The confluence of these two factors indicated that smart money is starting to cash out. If they are, they are doing it at the most perfect time as tech stocks such as AMZN, MSFT and INTC are trading at all-time highs. They expect retail traders to buy the dips because the prevailing message is that the longest bull market is still alive.
However, more signs that the stock market is due for a nauseating plunge are emerging. The pullbacks in AMZN, MSFT and INTC may just be the beginning of a wider and deeper correction.
Disclaimer: The above should not be considered trading advice from CCN.com. The writer does not own any shares of the companies or markets mentioned.