Three Things You Find When You Look Behind the Stock Market Curtain
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Small cap stocks were the biggest winner in the post-election market run-up. They were a no brainer, given the fact they derive less of their sales outside the U.S., and were the prime potential beneficiaries of Trump’s planned regulatory reductions, tax cuts, and infrastructure build out plans.
But lately, it’s been an entirely different story. Larger cap stocks are now dominating, with the S&P 500 up 6.9% year-to-date — and small caps in negative territory, as you can see here:
Source: Bloomberg
What’s more, when you look behind the curtain, you find the stock market story is even more complicated. Three trends are evident – and the mainstream media isn’t talking about them enough …
First, despite what you hear in the press about big gains in the S&P 500, only a narrow group of stocks are leading the charge. You have big-name story stocks like Amazon.com(AMZN, Rated “C”) and Netflix (NFLX, Rated “C”). Then you have only a handful of names doing well – including Microsoft(MSFT, Rated “B+”), up 14%, Apple (AAPL, Rated “B-”), up 34%, Alphabet(GOOGL, Rated “B+”), up 26%, and Facebook (FB, Rated “A-”), up 32%.
They make up over half of the gains in the S&P 500 year to date! And because the index is market cap weighted, the larger and more “tech-y” the company, the higher the returns. But the rest of the market is largely in “risk off” mode. In fact, almost 50% of S&P 500 stocks are below their 50-day moving averages. That’s an indicator used by technical traders to signify the start of a downtrend.
Second, we get an even more telling picture of potential market trouble when we zero in on small caps. Some 60% of them are below their 50-day moving averages. Worse still, 50% are below their 200-day moving averages – a confirmed down trend. Yikes!
Take a look at this table below. In it, I break down all the indices down into groups called deciles (with nine representing the largest companies and zero representing the smallest). You can see that no matter which index you look at as a proxy, one trend is clear: The larger the company, the better it fared – and vice versa. Or in simple terms, in this market, size matters.
Third, when you look at sector performance, you find some interesting things. Take a look at this table:
If you ignore telecommunication services, a category which only has a few companies, you find that utilities are performing remarkably well. That’s a typically safe, dividend-paying, conservative sector, or another mark of “risk off” behavior behind the curtain. Energy has been the worst sector, far and away, and small cap financials have also suffered. But the less-cyclical, more-defensive health care sector has shined.
The lesson I take away is this: Despite a few large cap stocks making new highs … and despite strong performance from a handful of tech stocks that get mentioned over and over again in the media … there are clear signs of weakness.
That’s one thing the sophisticated model behind my new Weiss Ratings’ Quantum Trader service has been picking up on. And in fact, subscribers in that service are now making money, safely, since its recent inception. You can click here to find out more.
Best,
Mandeep
Small Cap Edition, By Mandeep Rai, Senior Analyst Mandeep Rai has more than 15 years of investing experience, working as both a stock and credit analyst. At Weiss Ratings, he researches and evaluates financial and economic themes, and makes decisions on when to buy or sell specific shares for the Top Stocks Under $10 portfolio. |
