Large Cap Stocks Versus Everything Else

I’ve said it numerous times in the last few months, 2017 has been the year of setting records. No one said that trading or investing was supposed to be easy. Albeit some have had the false belief that it is drape around them like a warm blanket during the low volatility year we’ve had. Bitcoins have shot up hundreds of percent, U.S. stocks have refused to put in a material decline and we continue to dance as long as the music keeps playing.

One chart that’s continued to draw my attention and fascination is the strength of large cap stocks versus…. well, just about anything else.

This isn’t the first year by any means that we’ve seen focused strength within the market. Just a few years ago in 2013 if you tried to diversify away from U.S. large or small cap stocks you were penalized. Large cap growth was up 33.5% and small caps rose nearly 40%. Even though other markets had a good year, if you went international you underperformed w/ EAFE gaining just 22%, a “diversified” portfolio rose 20% and heaven forbid you owned bonds, which lost 2% that year. (figures from BlackRock). So a year of large cap strength isn’t anything new and shouldn’t cause too much surprise. But it has because we’ve seen a break from commonly health market believes about relative performance and risk-taking

Turning our attention back to this year and more specifically the last two months. The S&P 500, a cap-weighted index of U.S. stocks has continued to hit new highs as the index most recently moved through 2,600. Meanwhile, many of the other indices that often show positive notes of risk taking have been unable to keep up.

When large caps do well typically the smaller, higher beta/riskier stocks do even better, which we would see in the equal-weighted S&P 500 (RSP) outperforming the cap-weighted $SPX. That hasn’t been the case for the bulk of 2017.

What about high yield bonds? If stocks are doing well then junk bonds should be outperforming aggregate bonds right? Not for the last two months.

How about high beta stocks? When the U.S. stock market are hitting fresh highs and investors are ratcheting up risk then high beta stocks should see strength relative to the index…. not for the last two months, no.

Well if large cap stocks are trending higher then small caps surely are doing even better, because everyone knows that small caps outperform large caps in strong up trends don’t they? Historically yes, but not for the last two months.

As a technician and a follower of price supply and demand I find this truly interesting. The market never ceases to amaze.

But is this a concern? yes and no.

When we dig into the internals of the market and look at the breadth of U.S. equities we still have broad participation in the up trend. The various measures of the Advance-Decline Line are still showing confirmation, which means the majority of stocks are still rising – just not as much as the largest of the large caps. As Ari Wald, CMT of Oppenheimer notes with a chart shared by Josh Brown, “Value Line Geometric index, an equal-weighted aggregate of approximately 1,700 companies, has broken above secular resistance dating back to the year 2000.” Many international markets are still in up trends, we continue to see some degree of sector rotation within U.S. equities, a good sign that the baton is being kept off the ground for the current up trend.

So what’s the takeaway? I think there’s a couple points to draw from the chart above. First, understanding that blindly assuming that if the S&P is doing one thing then X,Y,Z, should also be occurring (i.e. high yield, small cap, high beta outperformaning). Being adaptive to the market environments and the ebbs and flows that come with each year is critical to active management within equities. Second, for the up trend to continue it would really be nice to see these divergences in relative performance resolve themselves. As we’ve seen with sector rotation, strength rotating to these other barometers of risk-taking would be welcomed by many market bulls.

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. Connect with Andrew on Google+, Twitter, and StockTwits.

Price and Seasonal Weakness Plague Mid Cap Equities

Last week I discussed the growing divergence within the S&P 500 as the largest components of the index were outperforming the smaller $SPX stocks. To continue on that topic, below we’re going to look at the S&P 400 Mid Cap Index.

$MID recent made a run back to its prior 2017 high but was unable to breakout, creating a lower high in momentum, based on the Relative Strength Index. This creates the third major lower high since its December as momentum continues to weaken for this mid cap index.

While the 100-day Moving Average was able to provide some support during the low earlier in the year, price has unable to gain transaction along with the large cap U.S. equities. The bottom panel of the chart shows the relative performance of the S&P 400 vs. the S&P 500. With relative performance having peaked in December, the ratio line has been putting in a series of lower highs as mid caps struggle to keep up. While price is still well off its prior low, relative performance is beginning to creep closer to its 2017 low, a bad sign for mid cap stocks.

Looking at volume on this daily chart, we can see a recent increase in large selling days. In early April we saw three consecutive above-average days of selling as a short-term low was put in for $MID. However, more recently two more days of above-average down volume have taken place – a sign that many traders attribute to institutional selling.

Turning our focus to seasonality, this recent weakness in the mid cap index begins to make a little more season. Based on the below chart from EquityClock, over the last 20 years, the S&P 400 has put in a short-term high in early May before picking back up later in the month

Going forward I’ll be watching to see how $MID acts if price gets back to the prior ’17 low and if the relative performance ratio does in fact set a new low. This period of weakness does align with long-term seasonality and if the seasonal pattern continues to play out we could see mid caps weaken further until later this month.

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. Connect with Andrew on Google+, Twitter, and StockTwits.

Recency Bias Creates Frustration With Stocks

Many investors, both professional and retail, have grown frustrated over the lack of growth within the U.S. equity market. There are probably several reasons for this, one being the over-confidence that’s been molded out of the lack of price-volatility like we saw on 2011 and 2009. But I think a large chunk of the frustration lies with investor’s recency bias.

The chart below is a simple monthly line chart of the S&P 500 ($SPX). I’ve marked with a blue performance line the 23 month period that ended in October 2014, which shows the market rose 46% during that time period. While the last roughly two years has seen less than 5% growth for the U.S. stock market. Investors grew accustom to seeing double-digit gains on their annual statements, requiring practically no outside diversification away from large cap U.S. companies. That market environment has dissipated and a little more effect has been required. And if there’s anything Americans hate, it’s the need for more effort (which is why we’ve invented self-driving cars, shoes that don’t require laces, and voice-activated text messaging).

spx-frustrationWhile the market lacks the heroin-like stimulus provided by the Fed, stocks must begin to learn to walk and grow on their own. Will we eventually breakout and begin seeing those double-digit returns once again? Or will things flip and those double digits will be to the downside? No one knows. But we must adjust our expectations and realize we may need to look outside simple U.S. large caps to find asset appreciation rather than sit and pout, sending Snapshats and answering Twitter polls waiting for something to happen in the S&P pits.
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. Connect with Andrew on Google+, Twitter, and StockTwits.