By J.C. Parets & All Star Charts
1/ Mega-Cap Tech Wreck
2/ Relative Strength in Robinhood
3/ Participation Expands for Small Caps
4/ Relative Trends Favor Energy
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1/ Mega-Cap Tech Wreck
The largest U.S. stocks by market capitalization, with the heaviest weightings in the major averages are Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), and Amazon (AMZN).
With quarterly earnings now behind them, these mega-cap growth stocks—excluding Apple—are all plunging to fresh lows this week.
The bearish take on this price action is simple. The Nasdaq 100 and S&P 500 may struggle to find a floor as long as these stocks continue to slide. As these mega caps comprise such a heavy weighting in capitalization-weighted indexes, their participation is vital if the indexes are to make a durable low.
On the other hand, we can look at the resilience from these indexes—despite the weakness from their largest components—as a positive factor. While the Nasdaq is just testing its October lows today, the S&P 500 is still trading about 4% above its mid-October lows. This could suggest improving internals beneath the surface.
2/ Relative Strength in Robinhood
Relative strength is one of our favorite tools as technicians. It helps us identify which assets are outperforming or underperforming, and how to position ourselves to take advantage of the current leadership.
The chart below shows the price trend of Robinhood (HOOD), overlaid with the stock’s peer group, the Global X Fintech ETF (FINX).
While these charts were trending lower in tandem earlier this year, their positive correlation decoupled in early September, as HOOD continued to rally while FINX rolled over. This week, FINX is notching fresh lows, while HOOD just reported an earnings beat and broke out to its highest level in over six months.
As investors, we want to embrace relative strength and focus on the stocks that outperform their peers. In doing so, our chances of succeeding, or at least beating the market, might increase. In that sense, HOOD could be poised for further outperformance in the near future.
3/ Participation Expands for Small Caps
We’ve been discussing the strength from small-cap and mid-cap stocks extensively in recent weeks. We continue to see relative strength and resilience as we move down the capitalization scale.
The chart below graphs the S&P 600 Small Cap Index, along with the percentage of S&P 600 components making new 21-day highs, shown in the lower pane.
Notice how new short-term highs for small caps eclipsed the reading from August last week, hitting their highest level since late 2020. The large-cap major averages were not able to top their readings from the summer, which further supports the leadership we’re seeing from smaller stocks.
While this indicator does not necessarily tell us that more index constituents are reclaiming their summer highs, it does tell us that the recent rally has been supported by a greater level of participation than previous rallies earlier this year. This improvement in market internals is a welcome development for the bulls.
4/ Relative Trends Favor Energy
Not all commodities are created equal. In fact, the commodity space is just as diverse as the stock market. That’s why it’s important to apply relative strength analysis to raw materials, just as we do with other asset classes.
Our equal-weight energy vs. base and industrial metals ratio provides an excellent illustration of this:
While energy and metals are both considered pro-cyclical groups, meaning that they benefit from an economic expansion, energy has led market gains off the pandemic lows. This chart highlights the current weakness from base and industrial metals as much as it conveys strength from the energy sector.
Energy has been the best-performing commodity group year-to-date, while base metals have been the worst. This diverging price action has sent the ratio back to its highs from 2014. If and when the ratio resolves above this resistance zone, we could see continued leadership from energy futures.
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Originally posted 3rd November, 2022
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