Nifty Fifty Redux? Large Cap Strength, Small Cap Weakness 7 comments
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The S&P 500 Index (SPY; blue line above) hit fresh bull market highs this past week, but note that the number of stocks registering fresh 20-day highs barely exceeded the number making new lows during the week. Steadily fewer issues have participated in the rally since September, reflecting a narrowing of the bull market's base.
Much of this weakness reflects the relative strength of large cap stocks compared with smaller cap issues.
For example, I took a look at the excellent Decision Point site and noticed that fully 97% of Dow Industrial stocks are trading above their 20-day exponential moving averages (EMAs). For the S&P 500 large cap stocks, that percentage is 72%; for the NASDAQ 100 large caps, the proportion is 75%.
When we look at the broad NYSE Composite Index, however, the percentage of stocks trading above their 20-day EMAs is 59%. For the NASDAQ Composite, it is 41%.
Although 72% of S&P 500 large caps are trading above their 20-day EMAs, that percentage falls to 61% for S&P 400 midcaps and 45% for S&P 600 small caps.
One logical explanation is that U.S. dollar weakness is benefiting large cap companies (which often have international operations that benefit from a weak dollar) more than small cap companies. If that is the case and U.S. dollar weakness continues, we could see a repeat of "Nifty Fifty", in which market strength is largely driven by the largest cap stocks.
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This article has 7 comments:
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1) Many have a substantial portion of their business in the international markets. This provides revenue in recovering economies in advance of the US market.
2) Along with more competitive pricing because of the dollar decline, the companies realize currency conversion benefits when they account for international sales.
3) Many pay significant dividends which help offset potential equity declines.
4) They offer heavily traded markets which facilitate option protection and executable stop loss orders.
5) They have negotiating power with suppliers and distributors in a bad economy.
6) In a future inflationary economy, they will have the ability to raise the top line through price increases. Although earnings may suffer short term, the firms should be able to price in the inflation, and unlike bonds, realize increased equity valuations, albeit in only nominal terms.
www.fibozachi.com/tech...
....Upon examining the chart below, please note:
1) how the Russell 2K not only immediately established itself as the veritable ‘tip of the spear’ within the very first few upwardly unison subdivisions of their sharp 8 month corrective rally but also that it has since remained the ‘leader of the pack;’
2) that while the Russell 2K led these six primary equity indices up-and-away from their intermediate-term bottoms in March, we anticipate that the concept of alternation will not necessarily witness the Russell lead to the downside so much as it will see traders pile into the last vestige of alleged ‘safety’ within the blue chips of the DJIA. Such nuanced herding would be highly reminiscent of activity first observed within the “Nifty-Fifty” of the early 1970’s and is exemplified best today by the almost 17% current weighting of AAPL within the NDX-100. Since the closing highs of October 19, the Russell has severely underperformed its peers.
3) that since May 27th, 2009, the respective percent gains within these six markets have not changed position relative to each other. In other words, the Russell 2000 has remained #1, with the NASDAQ remaining #2, NDX-100 #3, Wilshire 5000 #4, S&P 500 #5, and the DJIA #6.
4) that today marked the very first time that the NDX-100 has outperformed the NASDAQ Composite since March 9th, 2009.
Since small caps typically lead large caps within the structure of impulsive price action, we at Fibozachi will remain on the lookout for any change within the hierarchy of these six indices. If the Russell 2000 cedes its #1 spot to another index (particularly the DJIA) and begins to underperform its peers, it may very well give up the ghost for both the immediate and intermediate degree direction of price action. Such a change within the underlying character of price action across these key indices would serve as a stern warning that the scorching rally of Primary wave 2 (circle) had ended and that a strong downward reversal lay just over the horizon....
www.fibozachi.com/tech...
www.fibozachi.com/tech...
....don't be caught dead in XOM ... DOW components are going to see a massive influx of interest over the next few days/ weeks as traders / investors sell beta and move to the alleged "safety" of blue chips; can keep running into 1121 IF enough people jump on board the short train and open new put interest. There are three singular issues that traders MUST be aware of - XOM, IBM and AAPL.
XOM for its mkt cap weighting and its function across ETFs ... IBM bc of its massively outsized weight within the Dow Divisor ... and AAPL bc it is the true ringer within the NDX, the NASDAQ 100, at 17% of its weighting (thanks Allocation Committee, really cute) and the 'Cult of Cupertino' is THE cult du jour for everyone's sister, neighbor and local fast food cashier.
As the equity markets continue their topping process, being led by currency, leading commodities, lagging the Bond markets and paying no attention at all to credit spreads or such notably leading metrics as the Ted Spread ... $$$ will flow into blue chips and $$$ will come OUT of risk assets and anything beta-driven. Therefore, for equities this means that the RUSSELL 2K and NDX-100 will decisively under-perform while the DJIA markedly leads each of its higher beta brethren into a rolling top for all of Primary wave (2) circle....
www.fibozachi.com/tech...
....Equity markets have reached an ominous juncture of time, price and sentiment over the past week as we roll into pre-Thanksgiving seasonality, in which equity markets enjoy their single greatest bullish cyclical tendency across any such weekly interval period. While we at Fibozachi read the tea leaves of the weekly charts as being bearish, the hourly’s ought experience some immediate upside relief early in the week. We will be closely watching the market internals (TICK, ADD, VOLD and VIX) across interval periods of 1 and 5 minutes. Once the initial move higher exhausts itself, we will be paying extremely close attention to volume this week, which has been running considerably below average of late as we enter what is typically a low volume markup week into the end of many institutional calendars....