Will the market's current breakout be successful?

Posted by Stephen Sutherland on Wed, Aug 06, 2014 @ 01:30 PM

In this post we'll take a look at what has been happening in the market since early July.

This information is taken from The Big Picture, to download a sample copy please just click here.

Is the market’s current behaviour normal?

The way we use to check if the market is behaving as it should is to look at the trading action (price and volume activity) of institutional investors. Why do we do this? The stock market is about six month forward looking and its daily activity is the consensus conclusion whether institutional investors like or don’t like what they see happening down the road. By watching what the big players are doing (buying or selling) each and every day, it can provide essential clues to which way the market is likely to head.

It’s best to try to get ‘in sync’

Institutional investors control approximately 75% of the market’s future direction, which is why we aim to keep ‘in sync’ with them. If you don’t, it feels like trying to swim against a strong current. When you don’t get in sync, you often get hurt financially and that’s why we like to see if the 800-pound gorilla investors are buying, because when they do, it strengthens the market. However, if they are selling, it weakens it. The other thing we like to keep a close eye on is the behaviour of leading stocks.

If the market’s best stocks are acting weaker than the general averages, it’s negative. However when leading stocks are outperforming the market, it’s positive. When leading equities are underperforming, the market is more likely to head lower, and if the market’s premier stocks are outperforming, the market is likely to head higher.

Bull market? Bear market? Where are we?

Take a look at this 20-year chart of the NASDAQ Composite and you’ll see that the bull market that began in March 2009 (Point A) is just over five years old and for now remains intact.

The Big Picture August 2014 MARKETING image 1

Since the uptrend began, the NASDAQ Composite has made a very impressive 254.3% return. However, to make that gain it has had to experience three challenging corrections. The first (Point B) occurred from April to November 2010. The second (Point C) is a correction that started in May 2011 and ended in January 2012. The third (Point D), began in late March 2012 and finished March 2013. Recently the US technology index had another retracement but this one was not as challenging as the previous three. It started earlier this year on March 6th and it officially ended June 25th (Point E).

NASDAQ 100 leading the market higher

The NASDAQ 100 Index includes 100 of the largest stocks listed on the NASDAQ Composite based on market capitalisation. Notice on this daily 12-month chart that that its relative strength (RS) line is trending upwards (Point F). When RS lines are pointing upwards, technically it’s bullish and seen as a positive.

The Big Picture August 2014 MARKETING image 2

Large cap stocks lead latest rally

There is no doubt in our minds that since this latest rally began on the 15th April 2014, large cap stocks continue to outperform mid and small cap stocks. Take a look at this chart which shows the price performance of the NASDAQ 100 (large cap) compared to the NASDAQ Composite, the S&P 400 (mid cap) and the S&P 600 (small cap). The period we are highlighting begins 15th April 2014 (when the rally began) and ends 24th July 2014 (when the screenshot was taken).

The Big Picture August 2014 MARKETING image 3

As you can see, the large cap index, the NASDAQ 100 was the clear winner returning 14.2% and its brother the NASDAQ Composite came in second with a 10.9% return. Placed third was the mid cap S&P 400 returning 6.2% and the laggard of the bunch was the small cap index, the S&P 600 which returned a measly 2.8%.

Action we noticed recently

On Thursday 31st July 2014, the NASDAQ Composite dropped 2.09% (Point G) in above average volume (Point H). When the market retreats in heavy trade it’s seen as a negative because it indicates that institutional investors were selling. This big drop put the US technology’s 6-week rally under pressure however even with the substantial falls, the NASDAQ remained in it's sideways corridor with the floor at 4351 (Point I) and the ceiling at 4486 (Point J).

The Big Picture August 2014 MARKETING image 4

At the time this screenshot was taken (Friday 1st August 2014) it had further support at its all important 50-day moving average (Point K). The support at 4351 is important because it is also the point where the NASDAQ broke out 18th June 2014 (Point L).  However we have to remember that because it was trading near the bottom of its trading range, the breakout that it made 18th June now unfortunately has a slightly higher chance of failure.

This information is taken from The Big Picture, to download a sample copy please just click here.

As always, if you have any questions or thoughts on the points covered in this post, please leave a comment below or connect with us @ISACO_ on Twitter.


ISACO specialises in ISA and SIPP Investment and is the pioneer of ‘Shadow Investment’; an easy way to grow your ISA and SIPP at low cost. Together with our clients, we have an estimated £57 million actively invested in ISAs and pensions*. Clients like us because we have a great track record of ‘beating’ the FTSE 100**. Over the last 16 years, we’ve outperformed the Footsie by 60.2% and over the last 5 years, we’ve averaged 14.5% each year versus the FTSE 100’s 8.8%. You can find us at www.ISACO.co.uk.

What is Shadow Investment?

Picking the right fund for your ISA and SIPP is not exactly the easiest job in the world. And knowing 'when' to buy and 'when' to exit is even more difficult! Our ‘Shadow Investment’ Service is here to help. Our service allows you to look over our shoulder and buy the same funds that we are buying.

When we are thinking of buying a fund, we alert you so that you have the opportunity to buy it on the same day that we buy it. We also tell you about when we are planning to exit the fund. You control your investment account, not us. You can start small and invest as little or as much money as you like.

By knowing what we are buying, when we are buying and when we are exiting, throughout the year you can mirror our movements and in effect replicate our trades. This means you have the opportunity to benefit from exactly the same investment returns that we get. Our investment aims are 10–12% per year.

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* November 15th 2012: Internal estimation of total ISA and pension assets owned by ISACO Investment Team and ISACO premium clients. 
** Long-term performance: December 31st 1997 - December 31st 2013 ISACO 91.3%, FTSE 100 31.1%. 5 year performance: December 31st 2008 - December 31st 2013. ISACO Investment performance verified by Independent Executives Ltd.


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Topics: Investment strategy, Investment news