What the shakeup in Magnificent 7 stocks means for markets

Stock market indices have been propped up on the success of the Magnificent Seven tech stocks up until late. As market gains begin to slow, is the aptly named tech stock group likely to become a set of laggards rather a catalyst?

BTIG Managing Director and Chief Market Technician Jonathan Krinsky speaks on the bifurcation now evident, namely in Magnificent Seven components like Apple (AAPL).

"The two longest streaks we saw were in 2006 and 2014. So when they ended, neither of them marked any sort of major top," Krinsky tells Yahoo Finance. "We're certainly overdue for maybe a bit of a shakeout. And then within the Nasdaq 100, we are starting to see some dispersion and bifurcation... where last year was pretty much a uniform move higher for the Magnificent Seven. We've now started to see that breakdown..."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

[AUDIO LOGO]

- A rally in big tech has driven the market to record levels, pushing the S&P and the NASDAQ to recent all time highs. But it's not strength that we're seeing here across the board. Some cracks are starting to form in the Magnificent Seven trade. Invesco's QQQ, the exchange-traded fund that tracks the tech-heavy NASDAQ 100 is up just over 8% since the start of the year. Now, compare that to the underperformance that we've seen in Apple stock, which is off here in negative territory since the start of the year.

Here to tell us what that might signal ahead, we want to bring in Jonathan Krinsky. He is BTIG's Managing Director and Chief Market Technician. Jonathan, it's great to have you here. So what does this signal? Some sort of shakeout coming. And what do you think that could potentially look like?

JONATHAN KRINSKY: Yeah. Thanks for having me. So if we take a step back and look at the big picture, obviously, it's been an amazing rally for the NASDAQ in general. We've now gone actually over 300 trading days, consecutive trading days without a down 2.5% day on the NASDAQ 100. That's the third longest streak since 1990.

And so you could say that's a bit of complacency. You know, now, on the one hand, it is something you see in strong bull markets. The two longest streaks we saw were in 2006 and 2014. So when they ended, neither of them marked any sort of major top. But I think the point is that we're certainly overdue for maybe a bit of a shakeout.

And then within the NASDAQ 100, we are starting to see some dispersion and bifurcation whereas last year was pretty much a uniform move higher for the Magnificent Seven. We've now started to see that break down. Obviously, Tesla has been the weakest link. But Apple, as you mentioned, down about 10% on the year. And recently, Alphabet or Google has started to roll over and break below its 200-day.

So there's some dispersion going on. And then the last point we'd make is, what we noted yesterday to clients was a pretty rare setup in the sense that Apple-- the daily RSI was below 30 yesterday for Apple while the daily RSI for the NASDAQ 100 was above 65. We've actually never seen that since the inception of the QETF in 1999. The closest analog we have was back in late January 2018 when Apple's RSI got below 35 and the Q's RSI was still above 65.

That saw Apple have about a 8% drawdown while the Q's-- QQQ was hitting new highs into the end of January. And then that led to that period known as Volmageddon in early February of 2018.

- Yeah. I actually used to sit directly across from the office of Jonathan Jacobs, who came up with the NASDAQ 100, which led to the QQQs, of course. And is exactly what you're referencing there. It's really interesting here. One of the things that you put in your note, there have been lots of signals over the last few weeks that we haven't seen since either August 2020, tech will blow off or 2018's Volmageddon. What is the largest signal that investors should be paying close attention to right now?

JONATHAN KRINSKY: Well, yeah. Again, I mean, you there's been things such as the volatility index has been rising a bit or holding firm with a rising market. That typically signals some sort of inflection point. Again, we mentioned the Apple signal. It's interesting. Breadth has actually been broadening. We've seen a new high for the Russell 2000. We've seen areas like materials and energy and even REITs start to actually act better. So on the one hand, breadth is broadening, which, I think, is encouraging.

And that's something that investors have been waiting for a while, especially after last year was so dominant and not broad. So on the one hand, that is a good sign, on the other hand, if you look at some of the momentum indices or momentum strategies where it's simply buying stocks that have been going up, and generally, we are proponents of buying momentum.

But when it gets to an extreme and buying just begets momentum and you get some of these very extreme readings we've been getting, that's when it gets a little bit concerning. Some of the AI semiconductor stocks certainly are exhibiting that. You could even look at some retailers like e.l.f. Beauty or Abercrombie that have just been kind of one way to the upside. So at some point, the rubber band does stretch too far. And I think we're kind of at that point for some of these names.

- Jonathan, is this more indicative of more of a short term pullback rather than a top that could be forming over the longer term?

JONATHAN KRINSKY: I think so. I mean, if you think about the fact that we just-- earlier this year or late last year broke above that 4,800 level for the S&P 500, that was 2 years in the making. So typically, if you go two years without any progress, you break out from it, you're not talking about a major top at that point.

So maybe we do get a pullback and retest that 4,800 level on the S&P, which would probably be an attractive entry point. But yeah. I don't think we're talking about some sort of major top. Obviously, could be wrong there. But again, that broadening of breadth would argue against that. I think it's more just the near-term extended nature in some of the isolated pockets of the market.

- Jonathan Krinsky-- BTIG Managing Director and Chief Market Technician. Thanks so much for taking the time here with us today. Appreciate it.

JONATHAN KRINSKY: Thank you.