Several stock market observers have begun to sound words of caution with regard to the state of the Stock Market rally which has coincided with the election and inauguration of U.S. President Donald Trump. The Nasdaq Composite Index has gained 22.1 percent over the past year, and the Dow Jones Industrial Average, 17.8 percent.
After these strong gains, recent distribution in the general market has caused Investor's Business Daily to move their outlook to "uptrend under pressure," and Todd Gordon with CNBC to liquidate all of his long positions, and report having an eye on entering short positions.
A distribution day is a described by IBD as a day when a major average falls more than 0.2 percent, accompanied with heavier trading volume than the previous session on its respective exchange. Five to 10 distribution days in a short period often precede sharp market corrections. March 21, which Todd Gordon characterized as an "outside reversal," marked a day of heavy distribution in each of the major stock market averages. It was this action that Mr. Gordon states prompted him to sell his long stock positions that day.
Small caps underperform
The CNBC host expressed concern with the change of trend in the relative strength of the small-cap Russell 2000 Index versus the Standard & Poor's 500 Index and Nasdaq Composite.
He called the underperformance of the Russell versus the Nasdaq a "warning sign," explaining that during bull markets, small caps stocks generally outperform large caps.
Gordon noted that a chart of the Russell 2000 shows sideways "price action," which might not appear that negative. He explained that price alone doesn't "tell the whole story," and held this as a reason why he uses relative strength to discern strength and weakness in the market.
The trader called the Russell 2000 versus S&P 500 and Nasdaq lines "right on a breakdown period."
Severe March 21 'outside reversal'
The Nasdaq has rallied since February of 2016. The CNBC Trading Nation host asked his viewers to consider "the severity" of the March 21 sell-off on the Nasdaq, an outside reversal, which took out all of the price action observed for the previous 14 trading sessions.
Gordon defined an outside reversal as a day in which the high price was above the high price of the previous trading session, and the close price was below the low price of the previous session. He called the action on March 21 a "significant reversal."
The host pointed to the underpeformance of the small caps and the marked March 21 reversal, and cited a belief that caution was needed among stock investors moving forward. He noted that he isn't looking to enter any long trades, and said that he has his "finger on the trigger" to take shorts. "I'm concerned about this market," Todd Gordon summarized his view.
