Five Charts to Start the Week
Some quick reminders before we get into it since there are more of you reading this now than there were last week. First, this is my diary on the market. It is in no way shape or form investment advice. These are the conversations that I am having with myself as I take in all that is happening in the market while trying to square it with the prevailing narratives and fundamentals. I do this to give some clarity to my thoughts. If you like what you are reading, please consider passing it along to others who might like it as well.
Next, if you have an opinion, I would love to hear it, especially if you disagree with something that I am thinking. I promise you that after starting in this business as a summer intern at the New York Stock Exchange when I was 16 years old, I have extremely thick skin.
Finally, nothing I write here should be considered investment advice. It is highly likely that I have a different timeframe and risk profile than you do.
The top-callers were out in force as the GameStop drama was unfolding. The theory is that retail investors are always late to the party and the speculative action in the market certainly meant that the top was near. I have pushed back against this view, here and here, for a while and continue to stand my ground on this topic.
This week there are four charts that jump of the page at me that support my views. They point to increasing participation in the market’s advance and a broadening of risk appetite in the market…two things that I would not expect to see if the market was truly making a major top.
Chart One: Micro Caps. These are the smallest, highest risk names in the market. They closed at an all-time high on Friday. Even more interesting, the close of the week was also the high of the week. It seems that investors wanted these stocks and had no concerns about carrying risk over the weekend.
Chart Two: The Average Stock. The Value Line Arithmetic Composite Index was established on February 1, 1988, using the arithmetic mean to more closely mimic the change in the index if you held a portfolio of stocks in equal amounts. The daily price change of the Value Line Arithmetic Composite Index is calculated by adding the daily percent change of all the stocks and then dividing by the total number of stocks. For a long time a big part of the bear case on stocks was that there was not enough participation and that only a small number of large stocks were pulling the market higher. For the most part, that was true. Now, that bear case has been nullified. About the only concern that I can see here is that the index is extended at with a 200-day z-score above three.
Chart Three: The Median Stock. Averages, the means, can be skewed by big outliers so it is often better to look at the median. The Value Line Geometric Composite Index launched on June 30, 1961. It is an equally weighted index using a geometric average. Because it is based on a geometric average the daily change is closest to the median stock price change. This index is also trading at record highs after only recently getting above the 2017/18 levels. In early 2020, it actually made a lower high (dashed line) ahead of the COVID collapse.
Chart Four: Utilities vs the S&P 500. My friends Michael Gayed and Charlie Bilello wrote a paper about using the relationship between Utilities (a haven asset) and the total market (VTI) as a signal for increasing or decreasing risk potential in the market. The theory is that if Utilities begin to outperform, it is a sign of rising risks and the potential for the market to fall. Well the relationship between the two is now near its lowest levels ever.
Chart Five: The Dollar. This one is a risk signal that I am watching in order to stay objective and honest. There are others and I will look at them throughout the week. I have been in the camp that 2018 - 2020 was a bear market for most risk assets (aside from the mega-cap tech / communication stocks). During that time, the Invesco DB Dollar Bullish ETF (UUP) was rising (green box). The dollar topped as stocks made their COVID lows and has been falling ever since…and stocks have been rising. Last week while stocks move higher so did the dollar. If the greenback continues to move to the upside, that may be a cause for near-term concern. I am watching closely.
It’s hard to get overly bearish given the current backdrop, but that won’t stop people from trying.