Chart Advisor: I Find Your Lack of Breadth Disturbing

Articles From: Investopedia
Website: Investopedia

By Matthew Caruso, CFA, CMT

1/ Nasdaq Internal Weakness

2/ Next Generation Left Out

3/ A Confused Dr. Copper

4/ Dow Jones testing YTD support

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1/ Nasdaq Internal Weakness

Following up on yesterday’s deep dive into Nasdaq internals, today we take a look at the odd current environment in which the Nasdaq Composite stands approximately 10% above its 200-day moving average. Yet only 45% of its components have accomplished the much simpler feat of closing above their 200-day averages (Gold line). 

This lack of participation is representative of the action seen in most non-large-cap equities, which has been much closer to range-bound trading vs. the impressive YTD Nasdaq 100 advance. A dramatic change of posture by the Federal Open Market Committee (FOMC) this week may spur broader participation, but as it stands, the negatively diverging participation is a red flag for the Nasdaq Composite. 

2/ Next Generation Left Out

Not only has Nasdaq participation been narrow, but it has been wholly one-sided into the largest market cap securities. An interesting way to compare this staggering divergence in performance is to look at the Nasdaq 100 Next-gen index (QQQJ) and the Nasdaq 100 (QQQ). The QQQJ is an index of the next 100 largest market-cap Nasdaq stocks outside of the QQQ. 

As you can see in Chart 2, the ratio (blue) peaked in early 2021 and has fallen ever since. This declining ratio continues to indicate a risk-off posture among institutional investors as they currently prefer the more established and liquid equities in the QQQ vs. the higher risk and higher growth equities in the Nasdaq 100 Next Gen. 

A change in this trend will likely signal an end to the economic concerns related to inflation and the FED’s battle to extinguish it.

3/ A Confused Dr. Copper

When addressing the country on monetary policy, Jerome Powell continually reiterates his inability to accurately forecast when inflation will return to normal levels thus allowing the Fed to ease restrictive monetary policy. The world’s leading economic forecaster, Dr. Copper, agrees with Powell’s cautious and uncertain stance. Copper has been range-bound for over a year as the financial world attempts to forecast whether the Fed’s battle with inflation will ultimately result in a hard, soft, or no-landing for the economy. 

A decisive break higher or lower in copper from its multi-month range will indicate whether the economy can withstand the Fed’s aggressive monetary tightening. 

4/ Dow Jones Testing 2023 Support

As we work our way through September, the year’s weakest seasonal period, the Dow Jones Industrial Average is testing critical 2023 support. As can be seen in Chart 4, after breaking above clear multi-month resistance, the Dow is now pulling back and finding support at that same resistance. This support coincides with a trendline beginning from the depths of this year’s short-lived March banking crisis. 

The ability of the Dow to hold above its key support and trendline will help confirm any downside break in the previously mentioned copper chart.

Originally posted 19th September 2023

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