Thin Ice

Thin ice.  Stocks steamed forward yesterday despite scary jobless figures.  In thin, late summer trading, investors clamored for their old tech favorites.

N O T E W O R T H Y

Shortness of breadth.  No, I didn’t spell the word wrong.  The word is breadth, which is a broad measure of market performance.  I have written an awful lot on how the indexes that we watch every day are highly influenced by just a few big stocks.  In the case of the most-watched S&P500, the index is dominated by technology stocks which make up around 20% of the index and occupy the top 5 slots.  Technically, it is 6 slots because Alphabet / Google’s two share classes are number 5 and 6.  You get the picture, though.  If tech has a good day, the S&P will most likely have a good day as well.  Remember that except for the Dow Jones Industrials, the most highly quoted indexes are all market cap weighted.  That means the companies with larger market caps receive heavier weightings in the index calculation than those with the smaller market caps.  For example, Apple has the largest weight in the S&P500 at around 6.75% while Coty Inc. (maker of beauty products) sits right on the bottom of the index with a weight of only 0.004%. Coty’s stock slipped yesterday by -1.81% while Apple's stock rose by +2.22%. Though there are 504 other stocks in the index, you can see, through this extreme example, how bigger-Apple had more influence on the index than smaller- Coty.  The index was up by +0.32% for the day… thanks to Apple and tech friends.  What is even more interesting is that if you think about what causes a company’s market cap to get bigger the story gets even more interesting.  Market cap is calculated by multiplying outstanding shares by a company’s share price.  So, if a company’s shares are trading up, its market cap increases.  As its market cap increases, so does its weighting on the index.  That is why I like to refer to the S&P500 as the Winners Club, and the winners in that club of winners… are really powerful.  So now we know that just because an index is going up, it doesn’t necessarily mean that all stocks are doing well.  One way of getting a better handle of the overall strength of an index is to look at its breath. Breadth can be measured in a number of ways but the most common is to look at how many stocks went up in a session relative to the number of stocks that went down.  When more stocks go up than down the indexes are said to have good breadth, and vice versa. Yesterday, for example, with the S&P500 up +0.32%, only 151 member stocks were up while the remaining 344 lost ground.  The divergence is not a bad thing but analysts do like to take note of the divergences and consider it a warning sign that maybe a few stocks got ahead of themselves. Another way to look at it is that the leaders lead the way and the others will ultimately catch up (clearly a bull’s point of view… in this case).  On Tuesday, the S&P500 made its first all-time high since earlier this year after its precipitous fall in the early pandemic days of March.  Looking at breadth on that day, one would find that not everyone was part of that party.  In other words, the index made a new high with very little, or bad, breadth. Looking back in history, new highs are not often made on weak breadth.  According to research by Bespoke Investment Group, since 1990, just over 10% of all-time highs were made on days with weak breadth.  Before you start worrying, the same research showed that markets gained, on average, over +13% in the year that followed.  Clearly these are no ordinary times, but if the past is any guide, bad breadth in this case, may be a good thing.

THE MARKETS

Stocks rose yesterday despite bad weekly employment numbers.  Gains were led by technology stocks which dominate the tops of the cap-weighted indexes.  The S&P500 rose by +0.32%, the Dow Jones Industrial Average advanced by +0.17%, the Russell 2000 slipped by -0.49%, and the Nasdaq Composite added +1.06%.  Bonds rose and 10-year yields gave up -3 basis points to 0.65%.

NXT UP

- Markit Manufacturing PMI (Aug) may have increased to 52.0 from 50.9 while Services PMI may have risen to 51.0 from 50.0.

- Existing Home Sales (July) are expected to have grown by +14.6% compared to last month’s growth of +20.7%.

- Next week we will get more housing numbers, regional Fed reports, Consumer Confidence, Durable Goods Orders, GDP, PCE Deflators, and University of Michigan Sentiment.  Lots to look at, so please check back in on Monday for details and calendars.

daily chartbook 2020-08-21