Markets enter the last full week of August showing increasingly more bifurcation than we’ve seen nearly throughout this entire bull market rally (which I would argue actually ended in February of this year for US markets and in mid-2018 in most global indices).
Not even in February did we see the kind of massive overconcentration in Technology stocks that are dominating and distorting the indices and ETF’s like what has occurred in recent months. Investors have had to come to grips this year with knowing more than ever exactly what they own, as the traditional SPDR ETF’s certainly don’t do a very good job these days of representing “the market”. As discussed last week, the Equal-weighted Value Line Geometric index (Equal-weighted index of 1500 names) peaked out back in mid-2018 and tends to be a much better guide for US stocks than looking at the NASDAQ, or SPX. So, while SPX has indeed pushed back to new all-time highs, it’s arguable whether the broader market has actually accomplished this feat.
Yet judging by last week’s evidence of just 6% of all stocks hitting new all-time highs within the SPX, many investors might be frustrated that they’re likely not keeping up with index performance as the SPX charges higher to new all-time highs. After all, not everyone owns the likes of Apple (NASDAQ:AAPL) and Tesla (NASDAQ:TSLA) which have both skyrocketed more than 40% in the past month with much of these gains happening in just the last couple weeks. Furthermore, just last week we saw groups like Energy and Financials both break one-month uptrends. Both have shown ample deterioration in the month of August, faring far worse than broader averages. Meanwhile, popular indices like DJIA remain over 1500 points off all-time highs while Russell 2000 and Value Line Geometric average or the NYSE Composite are also nowhere near all-time high territory, diverging massively from SPX and NASDAQ. With all its drama, angst and uncertainty, 2020 truly is setting up to be the prime case study for massive internal stock market divergence.
In general, given such an unusual COVID-19 dominated year like 2020 which has already dealt most of us plenty of tension and stress, investors don’t want to be confronted with any more negativity, in hearing what is “wrong” with this rally. Most who tune into popular news media simply see “green” numbers on the screen and hear about AAPL having reached $2 trillion dollar in capitalization. However, there have been noticeable upticks in speculation and exuberance in recent weeks which is problematic heading into a tough seasonal period. Sentiment wise, one can argue the individual investor’s bullishness is finally approaching levels that align with the already extreme bullish institutional sentiment levels which have been excessive for more than a month.
Bottom line
It’s right to still lean long until the indices turn down, despite the internal rumblings in breadth. Our newfound rotation to Value lasted all of about 3 weeks before growth pushed back to new highs just last week vs the Value names. Treasuries have now rallied for 5 straight days while the Dollar is suddenly starting to firm up. As discussed, the NASDAQ Composite has registered 5 readings of negative breadth in the last three weeks. This represents the highest number of bearish readings in over 13 years in such a period since our prior Fall 2007 peak. However, as we’ve seen, indices have NOT broken down and remain trending up within uptrends and simply not weakening. It’s said that if Technology is dominating, then the “Big Five” are to be scrutinized carefully and held long “UNTIL” they make technical violations. Overall, the “Bradley Model” along with several other active cycles turn down starting between now and early September into the end of September and particularly the end of October. Thus, it’s thought that this bifurcation might finally give way in the weeks ahead. Until given more proof on trend violation, for now, it’s right to maintain a long bias, with tight stops and an eye on the exits as markets near September.