A third “Magnificent Seven” stock has broken below this major index. Should investors be concerned?

The stock market has been selling off a bit lately, but overall it’s still been a great start to the year. S&P500 It was up 7% as of market close on March 6th. But some major stocks are under pressure.

“Magnificent Seven” — microsoft (NASDAQ: MSFT), apple (AAPL 1.02%), Nvidia (NASDAQ:NVDA), Amazon (NASDAQ:AMZN), alphabet (GOOG 0.78%) (Google 0.77%), meta platform (NASDAQ:Meta)and tesla (TSLA -1.85%) The performance of these companies has ripple effects throughout the broader market.

Alphabet is down 6% year-to-date, joining Apple and Tesla in just below its 200-day moving average. Here’s why I’m interested in this metric: It’s not a buy or sell signal, but it’s interesting.

monitor where the stock has been

The 200-day moving average shows the average closing price of a stock over the past 200 business days. Traders track moving averages to gauge a stock’s momentum.

For example, a so-called golden cross is when the 50-day moving average exceeds the 200-day moving average, a sign that investors are becoming bullish on a stock. Interestingly, the current prices of his four stocks in the Magnificent Seven are above his 50-day moving average. and 200-day moving average — This is a very bullish sign.

NVDA data by YCharts

The 200-day moving average is often considered an important support level. When a stock’s price falls below its average, it’s a bearish sign that investors have turned negative on the stock.

GOOGL data by YCharts

Note that the 200-day moving average can vary significantly from the midpoint between the 52-week high and 52-week low.

In Apple’s case, the 200-day moving average is only 8% below its 52-week high, but nearly 25% above its 52-week low. This usually means either the 52-week low was short-lived or the stock has been hovering around the 52-week high for some time.

Understanding market sentiment

In the Magnificent Seven, a large gulf has formed between favorable stocks and unfavorable stocks. Knowing how the market feels about a stock can help you prepare for volatility, but it doesn’t necessarily mean the stock is worth buying or selling.

Markets always get things wrong. One of the best recent examples is the meta platform. Since the end of 2022, the meta platform has increased by over 310%. By 2022, it will have lost more than 64% of its value.

If you were only following the moving averages, you could have sold your meta platform in 2022 and missed out on the epic bull market that followed. If you simply held the stock, you would have done pretty well.

Another recent example is the goal (New York Stock Exchange: TGT). On November 9, 2020, Target crashed to a three-year low. Since then, it’s up a whopping 62.5% in just four months. This is an amazing move for a low dividend stock.

In other words, moving averages indicate market trends and can lead to accelerated buying and selling.

Use moving averages to your advantage

The best way to use moving averages is to understand how the market is reacting to something and see if you agree. For example, if you think Alphabet has some challenges but there’s no guarantee the stock will fall below its 200-day moving average price, you could use that as a buying opportunity.

Similarly, if you believe Nvidia is doing very well, but it’s not. very well If you believe that a stock’s price should be 80% higher than its 200-day moving average price, you may want to hold off on buying the stock.

In other words, you can use a stock’s price relative to its 200-day moving average to see if the market is in agreement. If it doesn’t match and the stock is oversold, it could be a great buying opportunity. If there is a match, the upside is already priced in and the risk and reward may not be worth it.

The moment when the greatest wealth is created is when the market goes negative for a stock, even though the investment thesis has not changed. There may be some challenges, but the selling is often overdone.

That happened with many technology companies in 2022. Before that, there was a crash due to the pandemic. There was also a notable decline due to the US-China trade war in 2018.

The point is, selloffs happen all the time, and sometimes they go too far. At the moment, some stocks may be rising too fast, while others may be facing a wave of criticism for going too far.

What the Alphabet Crash Teaches Us

The biggest takeaway from Magnificent Seven’s stock price movement is that the market can continue to rise even if important, heavily weighted stocks sell off.

Apple was once the world’s most valuable company and the clear market leader. Alphabet was once the third-largest company by market capitalization. Tesla was once worth more than $1 trillion and was the best-performing single stock in 2020. Yet all three stocks are currently moving in the opposite direction of the market.

The market rewards companies that are growing, have strong revenues, and have a clear path to monetizing artificial intelligence (AI). Companies that are supposed to lead in AI but fall behind the competition (like Alphabet) are also being punished.

The overall market is able to offset the losses of Apple, Alphabet, and Tesla, mainly because other sectors are also doing well. Industrials, financials, and consumer staples are examples of sectors other than big tech all hitting new 52-week highs.

Alphabet has fallen below its 200-day moving average, indicating that further selling pressure may be on the way. But if you think your investment theory hasn’t changed, you may want to ignore this signal.