The break today in Lululemon (LULU) and yesterday’s break in Google (GOOG) reminded me to bring up our previous discussion of the “Super Seven.” Last year we introduced this concept to the MarketSmith community as a means to assist with market directional analysis. At that time we identified the strongest leaders in the long term uptrend (since 2009) and started using the action in those stocks to help clarify the action we were seeing in the overall market.

While GOOG was not on the list at that time, I lump it in this discussion now because it is one of the institutional favorites that has helped to keep confidence in the market as of late. Over the past year we have seen many of the Super Seven top, including: GMCR, NFLX, CMG, BIDU, PCLN. While I’m not ready to call a top in AAPL or LULU yet, today’s action brings them one step closer to breaking. Overall the action on leading stocks has been poor these past few weeks.

The recent break in leadings stocks is significant for several reasons. First you must recognize who is behind these large moves down. Institutional buying, sustained over several years, is what drove these large cap growth stocks to such impressive heights. Sensing the top might be in, we are now seeing the big money trying to get out of them.

This activity is also important for psychological reasons. These stocks are the best growth stocks of this cycle. Due to their impressive gains, they have been highly visible and are watched by everyone. The past success of these stocks has given investors confidence in the market. But when the stocks that are bolstering confidence in the market get taken out, market psychology shifts negative.

Finally, you have to go back to our studies of history’s strongest leading stocks. When you get a big price break around the stock’s peak, the majority of times, that stock has topped and will correct on average 72%. And when institutional investors get around to selling the highest quality leaders from the bull market cycle, the longer term uptrend is most likely over.

Best Returns,

Scott O’Neil

President, MarketSmith

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