Don't Let the 'Big Five' Fool You
Time to look under the hood... Don't let the 'Big Five' fool you... How to spot a 'stealth correction'... Not everything is what it seems... A warning signal heading into the fall...
The 'Big Five' continue to dominate the stock market...
And we don't mean the top automakers...
Today, tech giants Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOGL), and Facebook (FB) make up an astonishing 23% of the benchmark S&P 500 Index, measured in market cap, with Apple leading the way as a $2.5 trillion company...
That means 1% of the 500 biggest companies in the United States make up nearly a quarter of the index that everyone – from financial news sites to your neighbor – quotes on a daily basis as the "market." Talk about a distorted view of reality...
This is why we always say it's crucial to "look under the hood" – be it with indexes that might not represent what you think, or the fundamentals of specific companies – to analyze what's really worth investing in today.
Here's what we mean...
The headlines will tell you the major indexes have made new highs every month this year...
And that's true.
Yet, as I (Corey McLaughlin) have pointed out before and will do again today, it's not that simple. What's key is market "breadth" – the number of stocks going up versus down – which has been worsening over the last several months...
The number of stocks listed on the New York Stock Exchange ("NYSE") trading above their long-term (200-day) moving averages has been trending down from near 90% in mid-March to roughly 70% today – which is still high, but a noticeable acceleration downward...
In fact, the average stock on the NYSE and tech-heavy Nasdaq Composite Index currently has a drawdown of 24% from its most recent high... while the S&P 500 is up 22% year to date, thanks to monster gains in 2021 from companies like Alphabet (68%), Facebook (42%), and Microsoft (39%).
We watched with interest a recent video from technical analyst David Keller of StockCharts.com, who talked about this point using a few different examples. But he said what we've been feeling lately...
Even though the market has been going higher, I would argue that from February, March, [and] April on, the market has been in what I would consider a "stealth correction."
There have been plenty of stocks that have been pulling back, especially in the last six to eight weeks.
While the indexes have been moving higher, the strength of the "mega-caps" have drawn the rest of the market up, even though a lot of individual stocks are breaking down.
Keller mentioned bank industrials like Boeing (BA), for example, which is down 2% in the last six months. What have also fallen are small-cap stocks, which, as our colleague Chris Igou wrote in Friday's DailyWealth, are now set for a major rally.
On a related note, today in their monthly "leaders and laggards" feature, DailyWealth Trader editors Ben Morris and Drew McConnell highlighted the best and worst-performing sectors of the last month…
In other words, how you feel about the market today depends on what's in your portfolio...
That might sound like an obvious, evergreen statement, but it's not always true...
For instance, we're not in all-out rally territory like we were from the March 2020 bottom through the end of last year, when it was easy to confuse a bull market for brains.
The hard part of long-term investing is here again...
For starters, we are reminded today to pick your "benchmarks" carefully... or at least understand what is driving them and where those movers might be headed. The fine print often doesn't match what the headline suggests.
The "Big Five" in the S&P 500 is one example. Here's another...
Take the growing-in-popularity ESG funds, which purport to place a heavier weight on companies that are concerned about "environmental, social, and governance issues."
Just some quick research will reveal that many of these funds aren't all that much different from the S&P 500 – or any other leading index for that matter.
The top five holdings in the Vanguard ESG U.S. Stock Fund (ESGV), for example, are Apple, Microsoft, Alphabet, Amazon, and Facebook. The "Big Five" make up 22.1% of the fund by market cap, just about the same as they do for the S&P 500.
Said another way, when someone says the "market" is selling off or rallying, they could mean the "Big Five" or ESG companies... and both would be correct for totally different reasons.
Second, in a market where not everything is what it may seem, you want to know what to avoid...
We're thinking here about the sectors and stocks that aren't performing well and could drag down your portfolio... and this is where we turn to our resident chartered market technician and Ten Stock Trader editor, Greg Diamond.
Greg has been writing about this "stealth correction" recently, especially with small-cap stocks in recent months.
In his most recent Weekly Market Outlook, Greg sent his subscribers another warning – this time about a handful of stocks that are showing weakness. But he also warned about the Dow Jones Industrial Average.
He said he'll be watching the Dow – and one of its top components, Caterpillar (CAT) – closely over the next two weeks because his indicators for the Dow and CAT are not bullish. Greg shared this chart and explained the annotations below...
I'm tracking what looks to be an Elliott Wave move of five waves up into early or mid-September, as marked with the blue dashed lines and red numbers. Five waves up or down in a stock marks the end of that move and a correction.
The relative strength index ("RSI") noted at the bottom of the chart isn't showing overbought levels, but it is actually making a lower high (red dashed line) from the previous highs back in the spring. This is usually a sign of momentum starting to slow.
As we've explained before, RSI measures the number and size of positive or negative closing prices for a particular stock or index, on a scale from 0 to 100... you can apply this indicator to basically everything.
The higher the number, the more overbought the asset is thought to be... The lower the number, the more oversold it is. In this case, the trend is showing that, for now, the Dow isn't the strongest place to park your money.
Even more, this performance in one of the major indexes – whose top weighted companies are UnitedHealth (UNH), Goldman Sachs (GS), and Home Depot (HD) – is a warning sign heading into the fall.
As Greg wrote to his Ten Stock Trader subscribers yesterday, a 'short-term top' is on the table in the weeks ahead...
With that said, let's make a few important points...
Greg is not recommending folks start shorting the market right now. At the very least, he says you should expect more volatility ahead. In his Ten Stock Trader service, he's preparing to take risk off the table and get ready to trade this volatility.
By that, he means following the price action of the stocks in his universe to determine when the "top" may potentially roll over… by how much… and then when the next "bottom" might arrive.
Our colleague Dr. David "Doc" Eifrig is patiently doing the same in his Retirement Trader options-trading service. Volatility has been down lately, but he doesn't expect that to last for long. As Doc wrote...
It has been nearly a year since we've had a market correction of 5% or more. That means we're due for one – especially given just how fast markets have been moving higher recently.
We're not trying to scare anyone out of stocks completely. As Ben and Drew said today in DailyWealth Trader, you just want to be selective...
Right now, we want to focus our bullish bets on the top six sectors – real estate, communication services, information technology, health care, financials, and utilities. And we want to be more cautious with the bottom five – materials, industrials, consumer staples, consumer discretionary, and energy.
But in the bigger picture, if you've been following our editors' advice, are minding your stops, and own a well-diversified portfolio, you're likely just fine for the long term.
But with the indexes hitting new highs – the Nasdaq did so again today – it's important not to get lulled into complacency and think that everything is rosy. Don't be surprised if we see a broader sell-off soon, but don't panic if it happens either. Just be prepared.
Get Ready for a Bank 'Bail-In'
The world is going to have another banking crisis, but the next time around, the banks are going to take depositors' money via a "bail-in." This is the latest theory from respected market watcher, David Morgan of the Morgan Report.
Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, LinkedIn, and Twitter.
New 52-week highs (as of 8/31/21): AbbVie (ABBV), American Tower (AMT), Comcast (CMCSA), CoreSite Realty (COR), Cintas (CTAS), Quest Diagnostics (DGX), Formula One (FWONA), Alphabet (GOOGL), ICICI Bank (IBN), Innovative Industrial Properties (IIPR), Intuit (INTU), Invesco S&P 500 BuyWrite Fund (PBP), ResMed (RMD), and Sea Limited (SE).
A quiet mailbag today... What do you think about the market today? Are you bullish or bearish? As always, e-mail your comments and questions to us at feedback@stansberryresearch.com.
All the best,
Corey McLaughlin
Baltimore, Maryland
September 1, 2021