Big investors, especially the institutional variety, love these big NASDAQ names for 3 reasons: earnings always seem to be good, the stocks can’t seem to go anywhere but up and they’re quite taken with the CEO’s. Each of these factors works on top of the others and so all time highs just keep coming.
It makes it easy to convince the investment committees when you stick to Apple, Amazon and Microsoft. As the portfolio manager you don’t have to take a lot of time to explain. As long as the paradigm stays the same and nothing ever changes, you get to claim that big year-end bonus.
The problem right now for the higher highs of the big tech stocks is that other key sectors are failing to make new highs. For a rally to continue full strength, you would want financials, industrials and materials to be keeping up. If they’re not, then a negative divergence is unfolding for the market as a whole.
Let me show you what I mean.
The Apple daily price chart looks like this:
The brilliant, original idea of Steve Jobs just keeps cooking under the leadership of Tim Cook. You could have purchased it at the March, 2020 low when the price-earnings ratio was back below 20. It’s no longer what you could call a value stock what with the p/e up there at about 33.
The Amazon daily price chart looks like this:
The Jeff Bezos business concept is doing quite well with new all time highs kicking in steadily, almost month after month. This is another one that might have qualified as a value right, just for a brief moment, at the 2020 pandemic lows. That’s not quite the case now, though, with Amazon’s price-earnings ratio all the way up to about 70, much higher than that of the S&P 500 which sits at 46.
The Microsoft daily price chart looks like this:
What a magnificent run, huh? From the January, 2021 low of 215 all the way up to its current 280. Not bad for six months time. Microsoft’s price-earnings ratio is 38, less than the market’s as a whole, but steep considering stock multiples in other areas of the equities universe. Bill and Melinda may be splitting up but it’s likely they’ll be able to afford divorce lawyers.
The negative “new highs” divergence between these actively traded, widely followed NASDAQ names and the following sectors is obvious if you take just a minute to compare the charts.
First, here’s the daily price chart the Industrials Select Sector SPDR, an exchange traded fund that better represents this sector than does the more narrowly focused Dow Jones Industrial Average:
No higher highs from May to now. This is weakness vis a vis the NASDAQ names.
The Financials Select Sector SPDR daily price chart looks like this:
Take a look at the lack of a higher high and then compare it to the Apple, Amazon and Microsoft charts.
Here’s the Materials Select Sector Index daily price chart:
So you have mass media blasting about all time highs for the NASDAQ-100 and the S&P 500 — meantime, key sectors not getting there going mostly unmentioned. This is a formula for disappointment for those investors who are not paying close attention.
The bull market coming off the big March, 2020 may not be over, but signs of tiredness, maybe even exhaustion, are becoming evident.
Not investment advice. Do your own research and consult with with a registered investment advisor before making any decisions.
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