Here’s the replay from my conversation with Mike Green and Harley Bassmanon their show last week. We had a great conversation about volatility, using technical analysis, inflation, did the Fed manipulate markets, and what’s unfolding in the market this year.
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.
This afternoon I went on Fox Business to talk with Charles Payne about the downside price levels I’m watching on the S&P 500, Nasdaq 100, and Bitcoin. I also discuss the bad breadth data that the market is showing right now – notably that the average Nasdaq stock is already down -33.3%.
Thrasher Analytics LLC is not registered as a securities broker-dealer or an investment adviser either with the U.S. Securities and Exchange Commission (the “SEC”) or with any state securities regulatory authority. Rather, Thrasher Analytics LLC relies upon the “publisher’s exclusion” from the definition of “investment adviser” as provided under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. The information contained in our reports, newsletters, or other produced content should be viewed as commercial advertisement and is not intended to be investment advice. The report is not provided to any particular individual with a view toward their individual circumstances. The information contained in our report is not an offer to buy or sell securities.
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.
Below is an excerpt from the December 12th letter sent to subscribers of Thrasher Analytics. To learn more visit www.ThrasherAnalytics.com
The topic of narrow leadership and participation has been around this year in various flavors, most notably in the summer ahead of the minor 5% pullback in September and once again most recently. Dip buyers have continued to show their strength, snapping up any drawdown shown by the mega caps. As we wrapped up trading on Friday with the S&P 500 at a new 52-week high, the average stock was down 10.4% and nearly 17% of the index is off its high by at least 20%.
The market isn’t required to get equal contribution by all its components, but when participation is broad it acts as a bullish sign the market is healthy. This year, just a handful of stocks have all that mattered to get the bulk of the gain obtained by the large cap S&P 500 index. As the year as progressed an increasing number of stocks have been unable to keep up with the index, finishing on Friday with just 46.8% of stocks outperforming the index year-to-date.
Individual Stock Contribution To S&P 500 Return Year-to-Date There’s been a lot of discussion by financial writers and bank analysts about the extremely narrow contribution to returns within the Nasdaq 100. The pie chart showing just five of the 100 stocks carrying most of the water is getting passed around. I prefer to focus on the S&P 500, which was the topic of my own study on the percent of stocks contributing to the index performance. Below we have the YTD contribution by each S&P 500 stock, sorted by index weighting and then put in groups of ten.
As you can see on the chart below, the top 10 SPX stocks have accounted for 40% of the year-to-date gain. Truly amazing. But what’s also just as impressive, there’s not a 10-stock group that is negative right now.
Individual Stock Contribution To S&P 500 Return Over The Last 3 Months Let’s look at the percent contributed to the last 3-months of the S&P 500 gain. Again, it was just the mega caps, the top 30 stocks, that account for 73% of the gain. Over 50% is accounted for by just the top ten stocks! When does Standard & Poor’s just ditch 450 of the constituents?
Annual Stock Outperformance: 2006-2021 Is it normal to see this low of a level in stocks showing strength? Below is a study showing each year’s percent of stocks that were outperforming the index, going back to 2006.
Typically, we see more than half of stocks outperform the index, with several years seeing a drift lower into year-end but rarely do we get below 45%.
A few periods stand out…. At the ’07 peak we got to 40%, also at the ’09 low when many stocks were assumed left for dead, we went below 45%. We saw a low level of outperformance in 2014 as the market stagnated and began to go sideways ahead of the decline in ’15 and ’16.
Annual Stock Outperformance: 2017-2021 Here’s a look at the same chart for 2017 to today. 2017 was a strong year for the index which received good support by individual stocks, having 55% outperform. Following the Feb. 10% decline in 2018, individual stocks struggled to recover and remained below 50% for the rest of the year until the Q4 decline of 20%. Stocks bounced back in early 2019 but struggled into year-end. Stocks got pummeled in 2020 and many individual equities were unable to keep up with the index after the Covid Crash.
This year we had strong outperformance by individual stocks in the first part of the year, hitting 60% outperforming the broad market and then things began breaking down in the summer, moving under 45% in early December.
While the sample size is small, when we’ve seen this small number of stocks able to outperform the index, the S&P 500 was more susceptible to a bearish move than when the majority of stocks showed strength.
So what’s it mean? In the simplest terms, it means that the stock market is heavily reliant on just a handful of stocks to fuel the latest leg higher. This on its own isn’t problematic if those stocks don’t disappoint. However, it does make the market more vulnerable to bearish headwinds should those handful of stocks not deliver and the market begins to “chase down” the other large cap components that have struggled to keep up. 2021 has been a posterchild example of a market that can bend due to narrow breadth but not break as a result of it. Will this last in perpetuity? History would suggest not but it doesn’t set an expiration date either.
Update: Charts and some of the commentary was updated on Dec. 14th to fix some of the formatting issues on the original charts.
Thrasher Analytics LLC is not registered as a securities broker-dealer or an investment adviser either with the U.S. Securities and Exchange Commission (the “SEC”) or with any state securities regulatory authority. Rather, Thrasher Analytics LLC relies upon the “publisher’s exclusion” from the definition of “investment adviser” as provided under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. The information contained in our reports, newsletters, or other produced content should be viewed as commercial advertisement and is not intended to be investment advice. The report is not provided to any particular individual with a view toward their individual circumstances. The information contained in our report is not an offer to buy or sell securities.
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.
I had the great honor to be interviewed on the Excess Returns podcast – hosted by Jack Forehand, CFA and Justin Carbonneau. It was a pleasure and a lot of fun diving into topics like: technical analysis, volatility, how my firm combines technicals and fundamentals in our process, and more. I hope you enjoy it!
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.
Before we dive into today’s post I wanted to share that my weekly Thrasher Analytics letter is 20% off for Black Friday until December 1st. Use code BlackFriday21 to save 20% on any of the subscription periods and begin receiving my analysis and updates on proprietary models. Go to www.ThrasherAnalytics.com to learn more.
Last week my friend and great technician, Jonathan Krinsky, CMT shared a really interesting chart and table pointing out the extreme bifurcation of the market at the March 2000 peak. As an example, he pointed to show the Bank Index was down 28.94% during the same period where the Nasdaq 100 rose 97%. By the peak in the market four sectors had already fallen by 14%-29%. This got me thinking more about the drawdown data that I often share in my Thrasher Analytics letter and occasionally on Twitter.
As of Friday (Nov. 19th), the average S&P 500 was down 9.8% which is just a day after the index had made a new all-time high. One great example the dot-com bubble taught us is the market can run much longer on fumes of a handful of stocks or a single sector before the selling in individual stocks finally breaks the proverbial camel’s back. So let’s take a look at the drawdown data from prior major market turning points and see if we can draw any conclusions.
There’s many different ways to approach the drawdown topic. Today I’m looking at not just the average drawdown of large cap stocks but the average drawdown between three sectors: Consumer Discretionary, Financial, and Technology. These aren’t the largest weighted sectors but I feel give a good representation of the ‘risk on’/offense nature of the market.
To quantify the drawdown data, I’m using a 1yr percentile for the average of the above mentioned sectors. When the percentile is low, it tells us that the figure has been declining over the last year, specifically when we reach the 60th %tile. Pairing this method of relative evaluation with an absolute figure of -10%. There’s nothing magical about 10% but tells us the average of the three sectors has declined by at least double-digits, which is significant. We’re looking for periods of time when the market was at least 0.5% from a 52-week high, meaning the index is basically at a high while the average drawdown is in a bearish trend and absolute level.
When doing this study, I set these two parameters before actually looking at the results and found the only times since 1995 the criteria was met was 2000, 2007, and 2018. With that, we’ll look at all three of these periods of time.
2000 First, the peak of the dot-com period, shown on the chart below. Our criteria of an average drawdown of 10% and below the 60th %tile began being met in November of 1999 and again in January and lastly in March of 2000. By the final peak in the S&P 500 the average of XLY, XLF, and XLK stocks were down -14.2%. This echoes the point Jonathan made about the extreme divergence in performance of individual equities and industries by the time the market eventually peaked.
2007 Next let’s look at the peak that led to the Financial Crisis in 2008. The fireworks started more in ’08 but the peak occurred in ’07. Only one day met the noted criteria and the divergence in performance wasn’t as severe as during the late 90s but the average drawdown was right around -10% by the peak in SPX but had been worsening for about five months as the index kept rising.
2018 The fourth quarter of 2018 brought a mini-bear market, breadth was weakening most of the summer and the indices began to reflect this weakness into the last three months of the year. Many stocks peaked back in January and after the 10% decline in February and March weren’t able to fully recover. Eventually the drawdown data got bad enough where our three sectors had an average of -10.2% in September and then -12% in early October.
Today How’s the data look today? We haven’t met the criteria of an average drawdown for the three sectors of -10%, as of Friday the average was 8.8%. The percentile is low at 44th, with the data having peaked back in late April. The average Consumer Disc. stock is already down -10% with tech not too far off at -9.2%.
Hopefully we don’t see this data weaken further. Currently equity seasonality is bullish with stocks traditionally doing well in the last two months of the year. This seasonal tailwind could help pullback up some of the weak stocks negatively impacting the drawdown data.
Conclusion So are we setting up to repeat 2000, 2007, and/or 2018? Based on drawdown data we aren’t there yet but it does appear the data is weakening.
This review of market history was to show that while there’s been some major extremes in data (dot-com bubble), the useful of drawdown data can be a great tool for evaluating the health of individual stocks. While % above moving average and new high/low lists are common and popular tools for breadth, they require either two inputs (price and a moving average) or overly focus on key dates (new low over 52wks, 6months, etc.). By simply looking at the raw price data of how stocks on average are declining (or not) we can pair the drawdown figures with other tools of analysis in evaluating the market, something I do on a daily and weekly basis.
Thrasher Analytics LLC is not registered as a securities broker-dealer or an investment adviser either with the U.S. Securities and Exchange Commission (the “SEC”) or with any state securities regulatory authority. Rather, Thrasher Analytics LLC relies upon the “publisher’s exclusion” from the definition of “investment adviser” as provided under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. The information contained in our reports, newsletters, or other produced content should be viewed as commercial advertisement and is not intended to be investment advice. The report is not provided to any particular individual with a view toward their individual circumstances. The information contained in our report is not an offer to buy or sell securities.
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.
