Why the Rally in the Stock Market is Misconceived

by Options Sensei |

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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