If you are looking for the canary in the coal mine for the current market turbulence, look no further than a handful of stocks that should show investors where things are headed. Especially for the Dow. The index’s gains this year have largely come from three stocks: Apple, Boeing, and UnitedHealth Group. 16 stocks in the 30-stock index have losses this year, but because of the quirky way the Dow is calculated, some smaller market capitalization companies have much more weight than larger ones (weighting is done by share price not market cap). Accordingly, this trio has outsized importance to the index, and if they fall, the Dow is likely to get badly hurt.
FINSUM: The Dow is quite funky, but this story points out just how vulnerable the whole index looks right now.
Small cap stocks have been taking it on the chin. They have been getting hammered this week, and their performance (Russell 2000) has lagged the S&P 500 by almost 3% the last few days. That is a rare occurrence, which means there may be a buying opportunity. After such a bout of bad performance, the Russell 2000 has historically outperformed the S&P 500 by a percentage point over the next 20 days.
FINSUM: This could be a good short-term buying opportunity, but as ever, we struggle with these kinds of trade ideas because they seem to be based purely on historical precedent and lack any catalyst.
Consumer confidence in the United States is at an 18-year high. The last time Americans registered a feeling of confidence this high was in September 2000. However, that could be a big problem for the stock market. Consumer confidence can prove a counter-indicator. The highest ever reading for the measure was recorded in May 2000, just before the Dotcom crash. Small business confidence is even higher, running at a 45-year peak. According to one analyst, “[To] any market historian, that does not guarantee a low-risk market, or another big bull market leg on the horizon”.
FINSUM: These kind of ultra-high measures do worry us as we feel healthy gains come in periods of reasonable concern, not euphoria.
Tech stocks and large caps have been getting all the headlines this year. There is increasingly a fear that only a handful of high-powered large stocks are driving the market. However, the reality is different, as small caps have been doing great. In fact, small caps have actually outpaced even the tech giants in appreciation this year. That is a very healthy sign for the market as it shows expanding breadth, which is typically a sign of a strong bull market that will continue. According to Bob Doll, famed portfolio manager from Nuveen, “Bull markets eventually end, and typically by the time you get to the peak, breadth is gone … This is a broad market move. It’s a good thing. It’s healthy.”.
FINSUM: We agree that this is very good news for the market. Even better, strong earnings growth has tempered high valuations, making things just a bit more reasonable.
Increasingly, investing in tech companies means you need to go big or go home. What we mean is that large cap tech companies have been outperforming their smaller peers handily. The S&P 500 Information Technology Sector is up about 14% this year, much better than the index’s 3.7% overall gain, but the S&P 600 Information Technology Sector has only gained 9.9%. That means that the largest tech company are significantly outperforming their smaller peers.
FINSUM: This is not a surprise given the overall momentum the FAANGs have had over the last few years. However, given the worries over regulation, it is odd to see they have outperformed smaller rivals very recently.