Gold Surges as Growth Stocks Break Down and Bear Flags Trigger

Technical Stock Market Briefing for Day & Swing Traders
| By Harry Boxer, Technical Market Analyst

Last week, after posting gains on Monday and Tuesday, the major U.S. stock indexes turned negative the next three days to finish with overall weekly declines ranging from around 1% to nearly 3%. For the S&P 500, it was the fifth negative result in six weeks.

Bear Flag Breakdown Raises Red Flags

Friday’s session was particularly negative, as most indices broke recent snapback rally bear flag patterns and are now indicating at least the possibility of a short-term downside follow-through.

Growth vs. Value: The Gap Widens

U.S. large-cap growth stocks lagged their value counterparts by a big margin, widening the value equity style’s year-to-date outperformance following growth’s market leadership in 2024. The growth index was down about 2.6% for the week, while a major value index slipped 0.4%. Year to date, the growth index is down 10.0% versus a 1.2% gain for its value peer.

The price of gold climbed for the fourth week in a row, extending a year-to-date surge that briefly pushed the precious metal’s price above the $3,100-per-ounce level for the first time. On Friday afternoon, gold was trading around $3,116, up about 17% year to date.

Can the Magnificent Seven Keep Leading?

For the past 18 months, one question has dominated conversations about the U.S. stock market: How much longer can the Magnificent Seven continue to outperform? No one can say for sure, and while it’s true that cracks are potentially beginning to show in the fundamentals of these tech-related mega-cap stocks, predicting a market peak has always been a tough call.

A few things are clear and worth noting. First is the sheer magnitude of the largest companies’ outperformance of the broader market: The Magnificent Seven generated nearly 60% of the S&P 500 Index’s return year to date through June; in 2023, that figure was 62%. The performance disparity between these few stocks and the rest of the market has been so severe that the Magnificent Seven now represent more than 30% of the S&P 500—even after accounting for a recent drawdown. Within growth stocks, the imbalance is even more exaggerated: Just three stocks in the Russell 1000 Growth Index recently represented one-third of the index.

What History Teaches About Outperformance

Periods of concentrated outperformance in the stock market aren’t unprecedented—think of the Nifty Fifty in the early 1970s and the dot-com bubble in the early 2000s. When these streaks end, the reversals can be sudden and severe.

Dow Theory Divergences Flash Warnings

It’s been apparent for several weeks that both the Transportation Index (TRAN) and the major small-cap index, the Russell 2000 (tracked by the IWM ETF), have been diverging negatively and not confirming the new NDX (Nasdaq 100) and SPX (S&P 500) highs. In Dow Theory, those kinds of divergences often lead to market tops and resulting bear phases.

Valuation Meets Reality

There’s no single reason behind these reversals, but one common theme persists: Companies with lofty valuations tend to carry equally high expectations. When growth stalls or fails to meet those expectations—whether due to tariffs, competition, regulation, or management missteps—the consequence is often a swift repricing.

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