The Expert System in TradingExpert Pro gave a 1 – 99 down signal on the Dow Jones on 8-27-20. The market internals based on the advancing vs declining issue in the New York market continue to diverge from the market price action.
The phase indicator used to confirm Expert Ratings turned down on 8-31-20. We usually look for a phase confirmation of an Expert Rating to occur within 3 days of the rating.
The changes made in the constituents of the Dow 30 effective 8-31-20
OK, first off a true confession. I hate it when some wise acre analyst acts like they are so smart and that everyone else is an idiot. Its offensive and off-putting – not to mention arrogant. And still in this case, all I can say is “Hi, my name is Jay.”
A lot of attention has been paid lately to the fact that AAPL is essentially swallowing up the whole world in terms of market capitalization. As you can see in Figure 1, no single S&P 500 Index stock has ever had a higher market cap relative to the market cap of the entire Russell 2000 small-cap index.
Figure 1 – Largest S&P 500 Index stock as a % of entire Russell 200 Index (Courtesy Sentimentrader.com)
So of course, the easiest thing in the world to do is to be an offensive, off-putting and arrogant wise acre and say “Well, this can’t last.” There, I said it. With the caveat that I have no idea how far AAPL can run “before the deluge”, as a student of (more) market history (than I care to admit) I cannot ignore this gnawing feeling that this eventually “ends badly.” Of course, I have been wrong plenty of times before and maybe things (Offensive, Off-Putting and Arrogant Trigger Warning!) “really will be different this time around.” To get a sense of why I bring this all up, please keep reading.
In Figure 1 we also see some previous instances of a stock becoming “really large” in terms of market cap. Let’s take a closer look at these instances.
Could AAPL continue to run to much higher levels? Absolutely
Do I still have that offensive, off-putting and slightly arrogant gut feeling that somewhere along the way AAPL takes a huge whack?
Sorry. It’s just my nature.
Jay Kaeppel
Disclaimer: The information, opinions and ideas expressed herein are for informational and educational purposes only and are based on research conducted and presented solely by the author. The information presented represents the views of the author only and does not constitute a complete description of any investment service. In addition, nothing presented herein should be construed as investment advice, as an advertisement or offering of investment advisory services, or as an offer to sell or a solicitation to buy any security. The data presented herein were obtained from various third-party sources. While the data is believed to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Past performance is no guarantee of future results. There is risk of loss in all trading. Back tested performance does not represent actual performance and should not be interpreted as an indication of such performance. Also, back tested performance results have certain inherent limitations and differs from actual performance because it is achieved with the benefit of hindsight.
You may have seen some of the articles out there analyzing the skewed nature of the current market rally. As Joe Bartosiewicz in his August 8 Bartometer pointed out:
“The Top 15 Stocks in the S&P 500 account in Market Value 35% of the entire S&P 500 stock market. The Bottom 420 Stocks in the S&P 500 account in Market Value 33.8% of the entire S&P 500 stock market. This means that 15 stocks are controlling the entire S&P 500..”
The Dow Jones 30 index uses a price weighted criteria as part of it’s calculation, and also includes Apple; AAPL has more than doubled in price in under 5 months.
Given that there appears to be only a small basket of stocks leading this rally, we had a look back at the last time tech related stocks were driving the market higher; the dotcom bubble that ran through the 90s into the early 00s.
Monthly DJIA and MACD – left through 3/2002 – right through 10/2002
The first chart is a monthly of the Dow 30 with MACD indicator comparing the market 03/29//2002 as the dotcom bubble rolled over vs 7 months later. Students of divergence analysis, will tell you that MACD in late March 2002 clearly showed prices should be much lower still despite the @33 % rally from the September 2001 low. By late October 2002 the market had fallen again by @33%. At that time the market was close to @40% lower than the high at the start of 2000.
Monthly DJIA and MACD – left through 3/2002 – right through 8/2020
The second chart is a monthly of the Dow 30 on the right through 8/10/20 vs the rally peak of 03/29/2002. The current market has had a @50% rally from the low at the end of March 2020. The original correction was @37% from high to low, slightly bigger than the dotcom correction. The MACD, similar to 2002, is strongly diverging.
The decline in 2002, after the rally, took prices lower than the the prior bottom. If a similar pattern happens this time and the decline is @40% from the high of 29568, the Dow would at the 17700 level.
As the COVID 19 Virus bounces back from a lower number a month ago, the stock markets, especially the technology stocks continue to rise. The difference this time is that although cases are rising, the number of deaths is much less proportionately than they were just 3 to 4 months ago. The reason, now the 20 to 49-year-olds are now getting the virus, but because they are generally healthier than the 70 to 80-year-olds, they are beating the virus as their immune system is stronger. The reason the technology stocks are continuing to rally is that people are staying at home and using Apple, Google, Amazon, Tesla, Netflix, Zoon, Docusign, etc.
One somewhat concerning fact is that The Top 15 Stocks in the S&P 500 account in Market Value 35% of the entire S&P 500 stock market. The Bottom 420 Stocks in the S&P 500 account in Market Value 33.8% of the entire S&P 500 stock market. This means that 15 stocks are controlling the entire S&P 500. This troubling skewed market is again showing that a very small number of stocks are making us money and the rest are on their back
It’s mostly technology stocks, large technology stocks. That’s it, other than some special situations. I am still positive on the stock market long term, but the large growth stocks, although still good for the longer term are now fairly valued and could have somewhat of a setback soon. The more aggressive clients are doing well as the aggressive technology stocks represent a bigger percentage of your portfolio than the bonds and dividend stocks. When the vaccine is available and people go back to work and when people feel safe to get back to some semblance of normalcy to make people want to travel, go to a local restaurant or simply to a movie, we could see these value and dividend stocks climb, but until that happens, the technology stocks will most likely dominate the stock markets.
Take a look below, The Dow is down 3%, The Equal weighted S&P 500 is down almost 4%, but the NASDAQ is up 22% because of 15 stocks and the values of their company controlling the entire market including the regular market-weighted S&P only up 5%.
CURRENT TRENDS:
Some of the INDEXES of the markets both equities and interest rates are below. The source is Morningstar.com up until August 8, 2020. These are passive indexes.
Dow Jones -3.0% S&P 500 +5.0% EQUAL WEIGHTED S&P 500 -4.0% NASDAQ Aggressive growth +22% Large Cap Value -5.0% I Shares Russell 2000 ETF (IWM) Small cap -9.0% Midcap stock funds -4.7-15.76% International Index (MSCI – EAFE ex USA -6.2% Financial stocks -18% Energy stocks -36.53% Healthcare Stocks +2.8% Moderate Mutual Fund Investment Grade Bonds (AAA) Long duration +1.5% High Yield Merrill Lynch High Yield Index -2.8% Floating Rate Bond Funds -3.4% Short Term Bond +1.6% Fixed Bond Yields (10 year) .85% Yield
Classicalprinicples.com and Robert Genetskis Excerpts:
Despite concerns over a weak recovery, the S&P500 reached my estimate of fair value. In contrast, the Nasdaq has far exceeded all prior measures of reasonable valuation. How can stocks rise with the economy so weak? There are two reasons. First, the economy is not weak. It continues to recover rapidly. Second, monetary policy is more expansive than at any time in history.
Although stocks are either fully-valued or over-valued, they can still go higher. At this point, I’m comfortable continuing to ride the wave higher while holding 10% cash for use when the market corrects. Stay cautiously bullish.
Friday’s employment report shows a gain of 1.5 million private-sector workers in early July. The number of unemployed remains high at 16 million. The good news is that weekly unemployment insurance claims continued to improve through the end of July.
The ISM surveys of manufacturers and service companies also show employment contracting. However, these surveys show a strong surge in new orders, which will lead to an ncrease in jobs in August. There are reasons why unemployment remains high. Given the uncertainty over the outlook, it’s natural to await new orders before hiring. Also, employers need to trim unessential costs to pay for the increased costs associated with the virus. Finally, government payments not to work have appealed to many.
Source: Classical Principles.com
S&P 500
Source:AIQsystems.com
The S&P 500 chart is above. It is the Market weighted index described on the first page. Because technology is a major component of this index, stocks like Apple, Amazon, Microsoft and more are making is look better than what the entire market is doing which is still down 4-10%+ if you look at all stocks.
I tried to make it simple see above. The 3390 area on the S&P 500 is major resistance and 3260, where the Up arrows are should act as support. Right below that is the 50 day moving average. Many traders or investors will sell if the S&P 500 drops and closes below the 50 moving average or the Trend line you see above. Many of you may want to sell if the S&P 500 drops below 3260. In addition the second graph shows the SD-SK Stochastics model as Overbought because the number is over 88. This is another overbought indicator.
Support levels on the S&P 500 area are 3328, 3264, 3150. 3390 is resistance.
▪ These may be safer areas to get into the equity markets on support levels slowly on the accumulation areas.
THE BOTTOM LINE:
The market has rebounded nicely over the last month mainly on the decline in Covid19 cases, and the economy reopening. The NASDAQ has done the best and should continue to do well IF the market continues higher, But now I am thinking that the small to midcap growth and value sector is more undervalued especially when the USA goes back to work and there is a safe and effective vaccine. The Midcap and Small caps could outperform if the rally continues from here. There is a major trend-line right below the markets, see above. If those are broken on a Close I will get Cautious to Very Cautious. It is important for the trendlines and the 50 day moving to hold or it could start a correction. I like the USA market better than the international market, however the International Emerging markets is getting interesting.
If you have any questions, please call me at 860-940-7020. Best to all of you, Joe Joe Bartosiewicz, CFP® Investment Advisor Representative
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Charts provided by AIQ Systems:
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In this article, dated 7/10/2020, I noted that my “Stuff” Index was coming on strong and that its performance may be a “shot across the bow” that some changes may be coming to the financial markets. Since then, the trend has accelerated.
STUFF vs. FANG vs. QQQ
Figure 1 displays the performance of STUFF components since 7/10
Figure 2 displays the performance of FANG components since 7/10
Figure 1 – Price performance of Jay’s STUFF Index components since 7/10
Figure 2 – Price performance of FANG stocks since 7/10
For the record, the “high-flying” Nasdaq 100 Index (using ticker QQQ as a proxy investment) is up +4.0% during the same time.
Is this a trend – or a blip? Unfortunately, I can’t answer that question. But it certainly appears that there is something afoot in “Stuff”, particularly the metals. Figure 3 displays the weekly charts for ETFs tracking Silver, Gold, Palladium and Platinum (clockwise from upper left).
When it comes bull markets in metals, the typical pattern historically goes something like this:
*Gold leads the way (check)
*Eventually silver comes on strong and often ends up outperforming gold (check)
*The other metals rise significantly “under the radar” as everyone focus on – literally in this case, ironically – the “shiny objects” (gold and silver)
Again, while I had inklings that a bull market in metals was forming (and have held positions in them for several years, and still hold them), I certainly did not “predict” the recent explosion in gold and silver prices.
Two things to note:
*Gold and silver are obviously very “overbought”, so buying a large position here entails significant risk
*Still it should be noted that both SLV and PPLT would have to double in price from their current levels just to get back to their previous all-time highs of 2011
So, don’t be surprised if “Stuff” enjoys a continued resurgence. Note in Figure 4 that a number of commodity related ETFs are way, way beaten down and could have a lot of upside potential if a resurgence actually does unfold.
What is interesting – and almost not visible to the naked eye – is the action in the lower right hand corner of these four charts. To highlight what is “hiding in plain sight”, Figure 5 “zooms in” on the recent action of same four tickers as Figure 4, but in a daily price format rather than a monthly price format.
Despite the ugly pictures painted in Figure 4, it is interesting to note in Figure 5 that all four of these commodity related ETFs have rallied sharply of late. There is of course, no guarantee this will continue. But if the rally in “Stuff” – currently led by metals – spreads to the commodity sector as a whole, another glance in Figures 3 and 4 reveals a lot of potential upside opportunity.
Time will tell. In the meantime, keep an eye on the “shiny objects” (gold and silver) for clues as to whether or not the rally in “Stuff” has staying power.
See also Jay Kaeppel Interviewin July 2020 issue of Technical Analysis of Stocks and Commodities magazine
Disclaimer: The information, opinions and ideas expressed herein are for informational and educational purposes only and are based on research conducted and presented solely by the author. The information presented represents the views of the author only and does not constitute a complete description of any investment service. In addition, nothing presented herein should be construed as investment advice, as an advertisement or offering of investment advisory services, or as an offer to sell or a solicitation to buy any security. The data presented herein were obtained from various third-party sources. While the data is believed to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Past performance is no guarantee of future results. There is risk of loss in all trading. Back tested performance does not represent actual performance and should not be interpreted as an indication of such performance. Also, back tested performance results have certain inherent limitations and differs from actual performance because it is achieved with the benefit of hindsight.
