A select group of stocks that have been the driving force behind this year’s market rally is now sending a warning sign that could indicate more losses on the horizon.
These so-called “Magnificent Seven” are a collection of mega-cap technology companies, representing the most valuable publicly-traded firms in the U.S. According to Michael Kramer, an independent stock-market analyst and founder of Mott Capital Management, these stocks have recently broken below the neckline of a “triple top” technical price chart pattern.
To illustrate this point, a composite index of these eight stocks (including both Alphabet’s Class A and Class C shares) can be seen in the chart below.
Technical analysts use patterns like the “triple top” to gain insight into potential future market movements. While skeptics may question its predictive power, analyzing these patterns can still help traders identify key levels where demand either increases or decreases.
The term “triple top” refers to a stock or index repeatedly failing to surpass a significant high. In this case, the Magnificent Seven reached their closing high for the year on July 18, with the composite index closing at 110.11. They tested this level again on Aug. 31, reaching as high as 108.17, and once more on Oct. 11 at 107.41.
On the chart, the neckline is represented by the 100 level. A sustained break below this neckline typically indicates a bearish signal.
However, as Kramer acknowledges, the market could still go either way. If the stocks manage to hold their current position, the outlook may become bullish, especially if a fresh catalyst emerges to drive stocks higher.
“The neckline has been broken, which is a bearish setup,” Kramer explained in a phone interview. “But if we can maintain our current position, it could become bullish.”
Nevertheless, the overall outlook for both the Magnificent Seven and the Nasdaq as a whole is appearing increasingly grim.
Market Turmoil Continues as Nasdaq Composite Falls into Correction Territory
The Nasdaq Composite (COMP), which primarily consists of the Magnificent 7 stocks, has fallen deeper into correction territory, with the Nasdaq 100 (NDX) likely to follow suit, according to Dow Jones Market Data.
Since the beginning of August, stocks have been on a downward slide as yields on 10-year and 30-year Treasurys reached their highest levels in 16 years. The 10-year Treasury briefly breached 5% for the first time since 2007 this week, according to FactSet data.
Despite the booming U.S. economy during the summer months, stocks like Alphabet Inc., Meta Platforms Inc., and Tesla Inc. have released disappointing earnings and uninspiring guidance. As a result, Alphabet’s Class A and Class C shares both plummeted more than 9.5% on Wednesday after its earnings report on Tuesday.
Market analysts and economists highlight that without the influence of the Magnificent 7 stocks, the S&P 500 (SPX) would be lower year-to-date. While the S&P 500 is up 8.3% according to FactSet data, the equal-weighted version of the index (RSP) is down more than 3%.
Data from Dow Jones Market Data reveal that the Magnificent Seven stocks have collectively gained $3.6 trillion in market capitalization as of Wednesday’s closing, accounting for all of the S&P 500’s increase and more.
Investors eagerly await the earnings report from another member of the elite group, Amazon.com Inc. (AMZN), after Thursday’s market close. However, Nvidia Corp. (NVDA), the standout stock, is not scheduled to report until November 21.
The remaining members of the Mag 7 include Apple Inc. and Microsoft Corp., along with Alphabet, Tesla, Meta, Amazon, and Nvidia.