Bank of America’s latest Global Fund Manager Survey paints a picture of a towering, increasingly shaky stock market edifice that could collapse at any time like a house of cards. Let’s take a look at how we got here…
A Few Big Winners, and Lots of Smaller Losers
In the week between Nov. 12 and Nov. 19, the Wall Street indices presented a rather diverse picture.
The Nasdaq 100 posted the best weekly performance among the U.S. indices with +3.4%. The S&P 500, on the other hand, managed only a plus of +1.5%. The Dow Jones Industrial Average, on the other hand, lost -0.6% and the small cap index Russell 2000 lost -2.4%.
You might expect that most of the Nasdaq 100 stocks have increased in value. However, this is not the case – the ratio of winners to losers still does not fit the trend of the broad index.
In the Nasdaq 100, only 49 of the 100 members represented were able to show a plus. Indeed, 15 shares even suffered a loss of more than -5.0%, with 5 of them posting losses of between -10.5% and -21.0%.
Due to the marginal decline in the S&P 500, you’d expect to see a balanced ratio of winners and losers. However, only 173 of the 500 index members show a weekly gain. Here we find no less than 70 stocks with losses of more than -5.0%. 6 of these stocks fell between -10.0% and -11.7%.
And the Russell 2000? Its ratio of winners to losers was 412 to 1,172 (5 stocks remained unchanged) or 1 to 2.8 – quite a suitable ratio.
Market Capitalization is Everything
What is behind these glaring disproportions? The answer to the riddle is market capitalization. By this we mean the price of a share multiplied by the number of shares in circulation or freely available.
The prices of all 3 indices mentioned are determined by the weighting of their members according to market capitalization. To give you an idea of the dimensions, Apple (NASDAQ:AAPL) stock currently has a market capitalization of $2.63 trillion. That’s equivalent to 12.4% of the entire U.S. gross domestic product last year.
Among the 15 biggest weekly gainers in the Nasdaq 100, we see Tesla (+10.0%), Apple (+7.0%), and Amazon (+4.3%) as 3 of the top 4 heavyweights in the index (Microsoft is #2). Incidentally, Nvidia (+8.5%) ranks #7 in the weighting list.
Apple and the U.S. Gross Domestic Product
Apple currently dominates the standings of the Nasdaq 100 with a weighting of 14.0%. It follows Microsoft (+1.9% plus in the previous week) with 13.6% and Alphabet (formerly Google; +0.2%) with 10.5%. Tesla, mega-price winner of the last weeks, has a 5.9% influence on the index, and Amazon has 9.8%.
Let’s do the math for a moment. These 5 stocks alone – all of which posted price gains in the last trading week – add up to a combined weighting of 53.8%. In other words, these 5 stocks are responsible for a majority of the Nasdaq 100’s motion. These would be the base of the house of cards.
Trend Width Continuously Decreasing
Finally, let’s take a look at the trend breadth in the Nasdaq 100. By this we mean the percentage of index members that are trading above a previously defined average line. The 50-day line, for example, represents the average of the last 50 closing prices and thus shows you the medium-term trend of the analyzed market. A member share that trades above its 50-day line thus supports the trend of the index.
In the following chart, you can see the Nasdaq 100 with the trend width for the periods of 50 and 200 days (long-term trend), i.e. the percentage of index members that are trading above their 50- or 200-day line.
As you can see, the Nasdaq 100 has gained +18.4% from its interim high in April (green vertical) this year. At that time, the percentage of stocks trading above their 50-day line was 87.3%.
Since then, the trend range has been trending downward. The current values are only 59.8% (50-day line) and 63.7% (200-day line).
Particularly noteworthy is the development from the blue vertical line on November 12. The Nasdaq 100 has gained +2.6% in this period, and the trend breadth points clearly downward in both cases.
A house of cards is characterized by the fact that it grows upwards, but fewer and fewer cards form the top. This is exactly what you see with the Nasdaq 100. In the past trading week, the ratio of winners to losers was 49 to 51, while the Nasdaq 100 gained a whopping +3.4%.
Since April of this year, the index has gained a little more than 18%. On the other hand, the trend breadth – the proportion of index members above their 50- or 200-day line – has since melted away sharply.
The index is actually rising only because a few extreme heavyweights are exerting a massive influence on its quotation. 3 of the 4 largest heavyweights by market capitalization posted price gains of between +4.3% and +10.0% in the past trading week.
The 5 largest companies by market capitalization (Apple, Microsoft, Alphabet, Tesla and Amazon) determine 53.8% of the value of the index. So the good performance of the Nasdaq 100 can no longer surprise anyone. The house of cards is getting higher and higher and at the same time more and more unstable.