1/ Relative Strength
2/ FANG+ Index Digesting Overhead Supply
3/ Growth vs. Value
4/ Asset Prices Are Not Normally Distributed
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1/ Relative Strength
It’s no secret that over 80% of the S&P 500 year-to-date return can be attributed to the top 10 stocks in the index. These behemoths are referred to as the mega-caps. If you lacked mega-cap exposure this year, your portfolio suffered.
Mega-caps relative to the total US Stock Market (2,806 companies) are trading at fresh multi-year highs. Thus far in 2023, high tracking error is synonymous with under-performance.
2/ FANG+ Index Digesting Overhead Supply
Taking a look at just the technology mega-caps, we review the NYSE FANG+ Index. This is an equal-weight index of the top 10 technology giants. The index recently formed new all-time highs in July and is trading well above an upward sloping 200-day moving average.
The index is consolidating and working through overhead supply. The price chart in recent months developed what technician’s refer to as a bullish flag pattern. This pattern typically resolves in the direction of the primary trend, which in this case is higher.
3/ Growth vs. Value
On the mega-cap level, it’s growth stocks that are outperforming value stocks. The below price ratio chart highlights mega-cap growth vs. mega-cap value. The chart is still trading below the COVID pandemic highs but has reversed course in 2023, amidst growing optimism in the Artificial Intelligence space.
4/ Asset Prices Are Not Normally Distributed
Asset prices do not follow a normal distribution. But investor’s gain insight from indicators that assume normal distribution. Take the below chart for example. The blue line is a ratio chart comparing mega-caps to small-caps. The lower panel contains the Z-score indicator, which tells us how many standard deviations away from the mean price currently is.
Historically, when the 2-year Z-score reaches beyond +3, it has signaled a potential peak in mega-cap performance relative to small-caps. The current reading is +2.49, which is no small feat. We’ve seen only 4 periods in last 10-years with mega-cap prices this stretched relative to small-caps.
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Originally posted 12th October 2023
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