Same old song…

I’ve noted in recent blogs, including the most recent Bear-o-meter report, that market breath has been narrow during the recent rally to the (so far) rather impenetrable resistance points on NA markets. Narrow leadership can last a while, but it almost always ends up ugly. As we saw in the periods leading up to to 2001 bear (tech), the 2008 bear (oil, real estate), the 2020 COVID crash (FAANGs), and the 2022 bear (Tech, ARK innovation stocks) – you need broad participation to keep the train rolling.

Today we are going to look at charts that illustrate the power of just 7 stocks on NA major indices. And why that may be a bad thing. Much of those leading stocks in the current rally back to technical resistance points on US indices have, once again, been in the big-tech group. Those stocks are heavy hitters in the SPX, but more so in the NASDAQ.

Currently, the leading 7 NASDAQ stocks by capitalization represent over 50% of the influence on the NASDAQ index of 500 stocks (May 18 data):

MSFT: 13.2%

AAPL: 12.5%

GOOG & GOOGL: 8.3%

AMZN: 6.8%

NVIDA: 5.7%

META: 4%

Contrast that with the equal weight NASDAQ index, where the 500 are, well, equally weighted. You can clearly see that its vitally important for this small group to do the lifting on the well watched composite index.

The S&P 500 also has significant influence (over 20% of its capitalization) by several on the NASDAQ’s uber-weighted list:

APPL: 7.3%

MSFT: 6.6%

AMZN: 2.7%

GOOG & GOOGL: 2.4%

NVDA: 2%

META: 1.5%

Here’s a chart of the NASDAQ composite (red line) vs. the equal wt. composite (black line). Note the failed breakout on the equal wt. index – vividly illustrated by negative comparative strength in the bottom pane.

 

Here’s the SPX vs Equal wt. (black line) vs the more commonly followed cap-weighted SPX. Note the comparative strength in the bottom pane. Same song as the above chart, just a different singer:

Been there, done that..

I’ll leave you with lone last chart to ponder on the consequences of a market that remains a one-trick pony for too long. Here’s the (black) Advances vs. Decliners (AD) cumulative line. Are more stocks rising than falling? That’s good! What about the opposite situation?

Note the negative divergence of the AD (black line) vs. the SPX (red line). Shrinking number of net advancing stocks vs. decliners. Bad breadth, baby!

Why does that matter….Well, you may want to note how a non-confirmation of the AD line during Q2, Q3 of 2021 lead us into 2022’s bear…

Something to keep your eyes on, folks!

 

Keith on Bloomberg BNN this Thursday May 25th, 12:00 noon

Be sure to call in with your questions. I do my best to get the producer to prioritize blog reader questions, so mention you read my blog.

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6 Comments

  • I do like your consistent way of looking at things. Thanks for illustrating a stick to the process mindset and its benefits.

    Reply
    • Thanks Harry. It comes from a history of being a lifetime amateur athlete. I have been training using rigid structure for bicycle racing for as long as I have been in this business (or longer). That structured approach to training created a mindset that translates to being able to stick to a program in market analytics. The greatest thing I have learned with training is that you have good and bad days, good and bad results, plenty of setbacks, plenty of self doubt, etc. But you learn to temper good or bad neartermed results–instead, you learn to trust and focus only on the process.-Over time, just keep doing what you’ve been doing and accept that its not all rainbows and lollypops, but long term it works. Trading with the odds. Training with the odds! Only consistency will bring you long termed results in trading and training. You can see how that athletic mentality easily transforms to trading.

      Reply
  • I love your thoughts on discipline. It does tend to translate into many contexts, and some really successful people I know are committed to physical training, too. Others just work all the time and are trainwrecks physically LOL!

    Keith, I was wondering if you’ve found through your long experience that certain very strong secular stories tend to hold up well and even gain through bear markets. If I recall correctly, Amazon managed this during the GFC. I thought maybe Nvidia would this time around due to their AI dominance, but it got shalacked last year. The problem with the high fliers is that they go up so much in good times people usually want to protect profits. They also tend to be high multiple, which bothers many when recession risk is out there.

    Also, I know from your books and blogs that the indices are in a kind of coiling pattern with a relatively narrow range and ceiling around 4200 for the S&P 500. With the poor breadth, small caps and cyclicals failing, divergences on indicators, is it probable that when the indices break out of the range, the move will be large? I’m thinking it breaks quite a bit lower than most are expecting, and then maybe we have a good set up for the last months of the year.

    Appreciate the blogs and videos!

    Reply
    • Excellent analysis Paula–I love it! True–Secular stories can hold up (even if its relative performance AKA fall less than markets) in a bear. In a severe meltdown (2022 was not severe at all) –aka 2001, 2008 — the momentum is so strong to the downside its difficult for anything to stay positive — but again, it comes down to relative strength.
      In my earlier years, I sometimes fell prey to crowded trades – now I am jaded. So I’m always cautious about neartermed pops like we just saw on NVDA. BUT…we are allowed to change our minds. If charts dictate more good times to come without too much froth and if the stock has a reasonable story (which is Criag’s job as VT’s CFA)–we can become persuaded.

      Reply
  • Unless I’m missing something, the Stockcharts free-version doesn’t seem to allow overlaying two (2) lines (in this case, AD vs. SPX).

    Would a ratio line (!ADLINENYA:$SPX) be a viable work-around to mirror rising or falling breadth? Although divergence-info is lost…

    Reply
    • Yes you can do overlays and correlations and all kinds of things with the paid version of stockcharts. IMO a subscription to a good service like stockcharts (amongst others) is vital if you are serious about trading.

      Reply

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