Why the Rally in the Stock Market is Misconceived

Why the Rally in the Stock Market is Misconceived

Posted On April 22, 2020 2:38 pm

The acronyms FANG and MAGA, which have become to stand for the cohort of mega-cap tech stocks “Microsoft (MSFT)” “Amazon (AMZN)” “Apple (AAPL)” Facebook (FB)” “Netflix (NFLX)” and “Google (GOOGL)” which have been investor favorites, and among the best performers, for the better part of a decade.

During the past few months during this time of COVID, with the exception of GOOGL, these stocks have further separated themselves from the rest of the market.

With the “SPDR Trust (SPY – Get Rating)” down some 15% for the year and the “Small Cap Russell (IWM)” is still in bear territory down 21% for the year. By contrast, the “Nasdaq 100 (QQQ)” which is dominated by the FANG/MAGA names is down a mere 3.6% for the year.

AMZN and NFLX are actually at new all-time highs by a large margin. The separation in performance is truly eye-popping.

These stocks became “must own” as their unique and dominant business models led to a virtuous circle in terms of garnering investment dollars. As their market capitalization grew started to represent an increased weighting in not just the tech-heavy QQQ, in which the five largest names are over 40% of that Index, but also the SPY.

In fact, the top five are now over 20% of the S&P 500, which is a clear record, far and away eclipsing a peak in 2000.

So, while this rally of nearly 30% from the March lows has been impressive, it may be less than meets the eye in that it’s had very poor breadth or participation.

We’ve heard how the economy is becoming a “winner takes most” and that is certainly happening in the stock market.

When judging the quality and potential sustainability of a risk-on rally, we like to see participation by a broad number of stocks in the market. Meaning the prospects for the current stock market rally may be less than stellar. That’s because we have seen a recent “thinning out” of the herd.

The recent gains were accompanied by less than 40% of both advancing issues and advancing volume on the NYSE. That has only happened 3 other days in history — all during or leading into cyclical bear markets.

Likewise, on the best day of last week, the large-cap QQQ was up nearly… Continue reading at StockNews.com

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Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.

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