NEW CANARY IN THE COALMINE TO WATCH – MOMENTUM STOCKS
TPA publishes the Canaries in the Coalmine each morning for clients. The Canaries are early warning signs that something has changed in the market. TPA has repeatedly told clients to be heavily weighted to BIGTECH and stocks that are either protected or benefit from the Pandemic. We have, however, also warned clients that BIGTECH and FAANGT need to be monitored given their huge weight in the market. TPA MO stocks are now included in the Canaries to watch for a signal that something has gone wrong in this historic bull market.
TPA MO stocks are TSLA, CRM, ADBE, AAPL, and NVDA. These 5 stocks have had huge rallies in the past month. The relative performance chart below shows that these 5 stocks have completely outpaced the S&P500 and the QQQ 2020 YTD.
RELATIVE PERFORMANCE OF TPA MO. STOCKS, S&P500, QQQ – 2020 YTD
Below is the top portion of the new TPA Canaries in the Coalmine report. TPA monitors the 5-day, 1-month, 3-month and 6-month change of its TPA BIGTECH and TPA FAANNGT indexes versus the S&P500. The next section looks at the ratio of the Momentum stocks divided by the S&P500 to watch for changes in relative performance. The important period to watch is intermediate; 1-month and 3-month. If the TPA MO stocks show confirmed underperformance in the intermediate timeframes, clients should look to reduce equity exposure. “ALERT” will appear in the “1 MO % CHG” AND “3 MO % CHG” boxes when underperformance is detected.
The tables below show just how concentrated the market has become. TPA BIGTECH, TPA FAANGT, and TPA MO now represent 31%, 22%, and 11% of the S&P500, respectively. The 3 indexes also make up 25%, 18%, and 9% of the Russell 3000 (98% of all publicly traded U.S. stocks).
Asset markets have screamed higher as populations around the world suffer through this crisis. Michael Hartnett, chief investment strategist for Bank of America, has put together his annual list of the top statistics on the size, composition, risks, returns, leverage, yields and valuations of the bond and equity universe.* TPA prints just 5 below that show:
The size of central bank involvement:“$1.4bn: central bank asset purchases every hour since COVID-19 March lockdowns”
The rally in just the TECH sector: “$1.6bn: Nasdaq-100 NDX, +1.03% market cap gain every hour since COVID-19 March lockdowns”
The speed of the market recovery: “34 days: equity bear market in 2020 shortest ever
The concentration of the stock recovery: “25%: market cap of FAAMG (FB, AMZN, AAPL, MSFT, GOOG) as % of U.S. stocks, record concentration
The concentration of global equity assets in U.S. TECH: “$9.3tn: market cap of U.S. tech sector GREATER THAN the entire market cap of Europe’s stock market”
Mr. Hartnett includes a chart of the concentration that occurred in the TECH/momentum rally of 1999-2000. Back then the heavyweights were MSFT, GE, CSCO, INTC, and WMT (chart below).
TPA can point to another market top that included a huge concentration of market cap in one sector. The chart below is interesting, because it shows that Homebuilders actually peaked in 2005, while the S&P500, driven by financials, did not peak until 2 years later. The largest Financials, JPM, BAC (MER), WFC, AIG, GS, and MS continued to rally after Homebuilders were declining, because the real money was then being made on derivatives of the housing boom. Still, even though they seemed like goliaths in the market in 2007, these 6 large financial stocks made up only 6% of the S&P500; a far cry from the weight of TECH stocks today.
HOMEBUILDERS, FINANCIALS, S&P500 – 2003-2009
Right now, TECH and MO are driving the market higher and investors can enjoy the ride, but TPA clients should also watch for relative underperformance in today’s momentum stocks and big TECH stocks for a signal that a change in overall market direction is afoot.
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