I remain quite bullish the overall market. I call what I see and what I saw in 2022 were stock market participants that turned incredibly bearish. I said at the beginning of 2022 that we needed a bear market brutal enough to send the masses to the sidelines and never wanting to own another stock – ever. Unfortunately, that’s what it takes. And the reason why we’ll continue going higher now is that no one believes we can. Here was a headline from CNBC last week:

Only 24% say now is a good time to invest in stocks, the lowest reading in the survey’s 17-year history. Perfect! Sentiment is a contrarian indicator and seeing this survey at an all-time low, even lower than during the financial crisis in 2008, tells me that everyone has sold and there’s a ton of money on the sideline to carry the stock market higher and higher.

Sentiment was incredibly bullish at the end of 2021. The equity-only put-call ratios ($CPCE) told us that retail traders were buying calls over puts by the fistful. We needed sentiment to “reset” and we’ve seen that on the CPCE. You can see from the headline above that pessimism is now at an extreme level, which will only add more fuel to the bullish fire.

How To Benefit From Higher Market Prices

I’ve told EarningsBeats.com members since the June 2022 bottom that market risk had shifted. It became too risky to remain on the short side and that moving to long positions carried much less risk. I suggested that ETFs like the SPY and QQQ were excellent choices to simply benefit from market strength. Many non-EB members scoffed at such bullishness, unfortunately, as the S&P 500 and NASDAQ 100 are now higher by 14.64% and 20.01%, respectively. Much to the chagrin of bears, we’re going a lot higher. Fight it at your own peril.

Individual stocks have, in my opinion, been much more difficult, because of the insane rotation that’s been a big part of the market since 2020. There’s always been rotation in the stock market, but it’s been the severity and suddenness that’s made it especially difficult in recent years. I’ve chosen mostly ETFs to profit from the inevitable rally, realizing the rotation risk that made individual stock trading very difficult. Even now, I pick my spots for individual stocks.

Finding High-Reward-To-Low-Risk Setups

Given the rapid rotation, you must be willing to accept periodic losses. That’s the case in any market, but it’s especially true right now. Trading isn’t always butterflies and cotton candy. The trading winds seem to change on a dime, so you’ll need to be extremely nimble if trading individual stocks. I’ll leave that decision up to you.

I am trading by my bull market rules, expecting pullbacks to be bought, while potentially taking profits at key price resistance. I’ll give you three individual stocks that I like right now, along with one leveraged ETF that makes sense as well.

RLI:

I love to trade earnings gaps. When a stock gaps up at the opening bell, market makers provide liquidity by shorting. That usually results in stocks moving opposite the gap, once we see the opening bell. When stocks gap higher and keep moving higher, it’s a signal to me of very strong demand. In those cases, I generally like buying at the top of gap support. RLI also has its 20-day EMA rising and just beneath this gap support. Entry from the current price down to 137-138 makes good trading sense to me. A close beneath the 20-day EMA would represent a potential exit, so perhaps 1-2% risk. I’d look for a recovery back to recent highs, so there’s potential here for a 7-8% gain. That’s at least 4 to 1 in terms of reward to risk, which I find attractive.

ROK:

ROK was a clear leader in industrial machinery ($DJUSFE) and the group was performing extremely well through mid-March. The group saw its relative strength drop at that point and ROK fell into a bullish wedge after profit taking ensued. All of this followed a negative divergence (slowing momentum) printed. Throw in the false breakout and reversing bearish engulfing candle, and it was time for a pause in the ROK rally. On Thursday, ROK gapped higher on better-than-expected revenues and EPS when its quarterly results were announced. The opening gap cleared resistance in its bullish wedge. I expect ROK to now uptrend and eventually test its 306 price resistance level. To the downside, ROK’s 20-day EMA is at 278.58. As long as it closes above that rising EMA, I’d be okay holding. Therefore, the upside is roughly 22 bucks and the downside is approximately 5-6 bucks. This sets up with a very nice 4 to 1 reward-to-risk ratio.

SOXL:

I love the recent selling in the Dow Jones U.S. Semiconductor Index ($DJUSSC) to a critical price support zone. This is the time, in my opinion, to take on additional risk, in the form of leverage. First, check out the chart on the DJUSSC:

The DJUSSC not only tested trendline support from the October and December bottoms, but it also tested a critical area of price support from 7200-7400. That is THE PERFECT time to consider leverage, because if we see a breakdown, you can exit quickly, losing only a small portion on the leveraged bet. But what if this marks a major turning point on the chart and semiconductors lead the stock market much higher? Jumping in on a leveraged product will enhance your return considerably. It’s why I bought the SOXL and sent this out as a potential trade to EarningsBeats.com members on Friday. Leverage must be used wisely. There’s no guarantee that SOXL will make a major move higher, but this is the most critical level on the DJUSSC chart right now. It’s all about managing risk, not being right all the time. That’s why I use technical analysis – to help me manage risk. Those who don’t believe in technical analysis will simply point out that it doesn’t work all the time and, therefore, ignore. Poor souls.

Tomorrow morning, I’ll provide my third and favorite stock trade set up of all in our EB Digest newsletter. It’s free and there’s no credit card required. If you’d like to stay on the right side of the market and receive tomorrow’s trade setup, simply enter your name and email address HERE. We’ll get your free subscription started and take care of the rest!

Happy trading!

Tom

Growth-oriented stocks tend to have their best relative showing vs. value-oriented stocks beginning in May and running through August. Check out the relative seasonal performance of the XLK (vs. the SPY) over the next four months:

If you add the bottom numbers of each calendar month (represents average monthly outperformance of XLK vs. SPY since 2013), it totals 5.8%. That means that the XLK has averaged outperforming the SPY by 5.8% per year since this secular bull market began in 2013. If you add up just the four months from May through August, you’ll find that it totals 3.7%. That means that 60% of the XLK’s relative outperformance occurs during just 33% of the year (May through August). Technical indications suggest the market is going to head higher, led by technology. Seasonality supports this notion.

I’ll be providing solid trade setups throughout the May-August period in our FREE EB Digest newsletter. If you’d like to subscribe, simply enter your name and email address HERE. I’m planning to share a current favorite setup in tomorrow morning’s EB Digest.

Happy trading!

Tom Bowley, Chief Market Strategist, EarningsBeats.com

After taking a short breather last week, the markets resumed their up-move and went on post a decent gain over the past five sessions. In the previous technical notes, concerns have been raised about the persistently declining value of VIX and the consequent vulnerability that it lends to the markets. This week as well, we saw the VIX testing its pre-pandemic 2020 lows by slipping below 11. The trading range of the NIFTY got a bit wider on the anticipated lines; it oscillated in the 476.65 points range. The NIFTY gained all five days; the benchmark index went on to post a decent gain of 440.95 points (+2.50) on a weekly basis. The month ended as well; NIFTY posted monthly gains of 705.25 points (+4.06%).

Things now continue to get more precarious than before. NIFTY has bounced off from the 200-DAY MA which is placed at 17655 making this point an important support point for the Index. On the weekly charts, it has held 100-Week MA as a support which is currently at 17214. This makes 17214-17655 a strong support area for the NIFTY in the event of any corrective move. Importantly, INDIAVIX continued its decline; this week it slipped below 11 to close at 10.95 by losing 5.87% through the week. This is a precariously low level; INDIAVIX has also tested the pre-pandemic 2020 lows and this now stays overdue for a spike. While we continue to chase the up moves, one must never forget that any spike in the VIX can leave the markets extremely vulnerable to sharp profit-taking bouts.

The coming week is a short week. Indian markets would open on Tuesday as Monday is a trading holiday on account of Maharashtra Day. The levels of 18130 and 18250 will act as important resistance points. The supports will come in at 17900 and 17710 levels. The trading range is likely to get wider this week.

The weekly RSI is 56.29; it has marked a new 14-period high which is bullish. However, it continues to stay neutral against the price. The MACD is bearish and below the signal line; however, the narrowing Histogram shows this indicator on the verge of a positive crossover.

The pattern analysis of the weekly chart shows that the after taking a short breather, NIFTY has resumed its up-move and it remains above the small falling channel that it had formed for itself. In broader terms, the combined reading of the daily and weekly chart shows that the zone of 17650-17250 is a strong support area for the index in the event of any retracement. Although there are no visible signs of any indications that the markets may correct, the dangerously low levels of the India Vix have left the markets vulnerable to almost certain, overdue, sharp profit-taking bout over the coming days.

As we approach the coming week, we must be chasing the up-moves very cautiously. It is just a matter of time before we might see ourselves getting caught on the wrong side of the trade. The long players should very strictly trail their stop losses; any fresh purchases should be kept very stock-specific and preferably outside the front-line indices. It is time that we get ultra-selective in our approach toward the markets and protect all profits in an extremely vigilant manner. A cautious outlook is advised for the coming week.

Sector Analysis for the coming Week

In our look at Relative Rotation Graphs®, we compared various sectors against CNX500 (NIFTY 500 Index), which represents over 95% of the free float market cap of all the stocks listed

The analysis of Relative Rotation Graphs (RRG) shows that Nifty Midcap 100, Infrastructure, FMCG, Financial Services, and NIFTY PSE Indices are inside the leading quadrant. Though these groups may continue to relatively outperform the broader markets, many are seen giving up on their relative momentum and taking a breather.

Nifty Bank, NIFTY PSU Bank, Auto, and the IT indices are inside the weakening quadrant. Among these four, while IT and Audo continue to rotate southwest, the Banknifty and PSU banks are seen sharply improving on their relative momentum.

NIFTY Metal and Media are inside the lagging quadrant. Though they are also seen improving on their relative momentum, they may continue to relatively underperform the broader markets.

The commodities index has rolled inside the improving quadrant. Nifty Energy, Consumption, Pharma, and Realty Indices are also inside the improving quadrant and are seen firmly maintaining their relative momentum against the broader markets.

Important Note: RRG™ charts show the relative strength and momentum of a group of stocks. In the above Chart, they show relative performance against NIFTY500 Index (Broader Markets) and should not be used directly as buy or sell signals.  

Milan Vaishnav, CMT, MSTA

Consulting Technical Analyst

www.EquityResearch.asia | www.ChartWizard.ae

In this episode of StockCharts TV‘s The MEM Edge, Mary Ellen reviews the short-, intermediate-, and long term outlook for the S&P 500 after last week’s bullish late-week price action. She also examined the Dow’s out-performance this month and which stocks are poised to continue driving this Index higher.

This video was originally broadcast on April 28, 2023. Click on the above image to watch on our dedicated MEM Edge page on StockCharts TV, or click this link to watch on YouTube. You can also watch on our on-demand website, StockChartsTV.com, using this link.

New episodes of The MEM Edge air Fridays at 5:30pm PT on StockCharts TV. You can view all previously recorded episodes at this link. You can also receive a 4-week free trial of her MEM Edge Report by clicking the image below.

The markets began last week with a sharp pullback that pushed the broader Indices toward key support, with many individual stocks breaking below support. The drop occurred amid renewed banking fears after Tuesday, when San Francisco-based First Republic Bank (FRC) reported a slump of more than $100 billion in deposits in the first quarter. 

Technology stocks were hardest hit, with Software and Semiconductor stocks down 3% Tuesday as investors sold shares in the face of FRC’s instability. Heavy selling on negative news such as last week will shake out weaker hands, but it can often pave the way for a sustained rally afterward — if market conditions are ripe, that is.

The major Indices were in fact able to find support, led by gains in mega-cap stocks such as Microsoft (MSFT) and Meta Platforms (META), who reported better than expected earnings. Stocks in other areas also drove the markets higher on Thursday and Friday after posting strong quarterly results, while also guiding growth higher for the year.

DAILY CHART OF S&P 500 INDEX

The broad-based rally later in the week not only pushed the S&P 500 back into an uptrend, but it helped improve breadth enough to inject some fuel into the markets. Next week will provide some major hurdles, however, as we head into Wednesday’s FOMC meeting and Powell’s post-meeting speech.

At this time, traders are anticipating a ¼% hike in the Fed Funds rate while also on the lookout for news that the hike will be its last one. Recent inflation reports, such as today’s core Personal Consumption Expenditure (PCE) data — a closely watched report for the Federal Reserve — showed that inflation is drifting lower, but overall, it remains quite sticky. 

As highlighted in the S&P 500 chart above, 1200 is the next area of resistance and, should we move above this level on volume, the current rally may last longer. In addition to next week’s interest rate decision, Apple (AAPL) is due to report earnings on Thursday after the markets close, as will 800 other companies as we head into one of the busiest weeks of earnings season.

If you’d like to be alerted to any shift in my outlook for the broader markets, use this link here to take a 4-week trial of my twice weekly MEM Edge Report for a nominal fee. We stayed with the high quality stocks on our report’s Suggested Holdings List last week, despite cracks in some of the charts. These stocks are now poised to trade much higher, and you’ll receive immediate access to this list as well as in-depth sector and industry group analysis.

Warmly,

Mary Ellen McGonagle MEM Investment Research

Below is just one of several headlines about stagflation we have seen this week.

From April 27, 2023, TheStreet.com:

“Stagflation Risks In Focus As U.S. Economy Slows, But Inflation Stays High”

“The coveted soft landing is looking increasingly difficult to achieve and we are now getting towards a position where the market may become concerned that stagflation could be a likely possibility. The next set of inflation statistics are going to be crucial for the subsequent moves by the Fed.”

Now that stagflation has gone mainstream, we thought it a good time to review:

How ahead of the curve we were; andIf the trades we loved coming into a stagflationary environment are as exciting as they were when we were well ahead.

I dug up this Daily I wrote on February 26, 2020, PRE-COVID lockdowns. The chart of DBA (Agriculture Fund ETF) above, is from the same day.

“But what has held and could complete the ‘flation’ part of the stagflation scenario? Soft and agricultural commodities.

“Let’s take an example: DBA. The 2019 low was 14.62. The 2020 low from yesterday is 14.65. That could be an auspicious double bottom.

“It also could be the start of what we are already seeing from the human ‘psyche,’ like the hoarding of toilet paper: The rising awareness that if food production and distribution begin to seriously falter, raw material prices will skyrocket.”

Now, typically with everyone talking “stagflation”, the trades we loved from 2020 until now have become less interesting.

Clearly, fresh news can emerge (Mother Nature, Social Unrest, Geopolitics, etc) and create a new spike in food and metal prices. However, the economy might have contracted enough and will now just limp along for a year or so. Plus, inflation might have peaked, but will stay elevated in more of a sideways pattern. If this turns out to be correct, the real nagging and difficult to navigate stagflation is here.

Truly, that is the most difficult time to invest. It is also when great stock pickers prevail.

Looking at the gold (GLD) chart from April 28, 2023 supports the not-as-interesting-now trade theory. GLD is trading under the 50-DMA (blue), confirming a caution phase. The island top from April 13th is intact. Generally, that is a reliable signal of a top where we could see a 10% decline in price from there. That could take GLD down to around 172-175.

Real Motion, MarketGauge’s proprietary momentum indicator shows that GLD’s momentum has declined. However, it is coming close to support at its 50-DMA and, if it holds, could mean the price clears back over the 50-DMA on the price chart.

So, we are not bearish or bullish right here. We are simply pointing out that we were incredibly bullish up until recently. Now, we need something fresh to happen to spike gold up above the island top. A decent trade, but not, as we have been touting before, the best trade we see.

DBA is in a better chart position. It remains trading over its 50-DMA at 20.77. The phase is bullish, and the slope is positive. Should DBA hold above the 50-DMA and take out the recent highs, then we can assume one of those potential fresh news events happened. If not, the Real Motion indicator signaled a mean reversion on April 21st.

Momentum is declining, so we need to see that change to a more upward momentum and back over the Bollinger Band (dotted). Both GLD and DBA could turn out to be exciting, but right now, considering inflation might have peaked but will stay elevated in more of a sideways pattern, we are neutral both instruments.

As far as stock picking, please refer to all the articles written on the 23-month and 80-month moving averages on our website. Here is one: Gaining an Edge in a Tough Trading Year.

Our discretionary trading strategy is now based on finding instruments using our Complete Trader Scans that fits one of these setups:

Buying instruments close to but holding the longer-term MA, Shorting instruments that have failed the shorter-term MABuying momentum on instruments that are clearing the shorter-term MA.Keeping all trading light until the SPY clears the shorter-term MA. And when/if SPY does, we will buy but also watch to see if small caps (IWM) can get close to its MA at 200.

My prediction: SPY, QQQs, and DIA continue to rally until IWM cannot clear $200; then, everything sells off again.

Mish in the Media

Mish and Nicole Petallides discuss cycles, stagflation, commodities and some stock picks in this appearance on TD Ameritrade.

Mish talks movies and streaming stocks with Angela Miles on Business First AM.

Mish and Charles discuss zooming out, stagflation and picks outperforming stocks in this appearance on Making Money with Charles Payne.

We all know at this point how difficult the market has been with all of the varying opinions regarding recession, inflation, stagflation, the market’s going to come back, the market’s going to collapse – ad nauseam. What about the people stuck in the middle of a range bound market? Mish presents her top choices for shorts and longs on the Friday, April 21 edition of StockCharts TV’s Your Daily Five.

Mish and Benzinga discuss the current trading ranges and what might break them.

Mish discusses what she’ll be talking about at The Money Show, from April 24-26!

Mish walks you through technical analysis of TSLA and market conditions and presents an action plan on CMC Markets.

Mish presents two stocks to look at in this appearance on Business First AM — one bullish, one bearish.

Mish joins David Keller on the Thursday, May 13 edition of StockCharts TV’s The Final Bar, where she shares her charts of high yield bonds, semiconductors, gold, and regional banks.

Mish joins Wolf Financial for this Twitter Spaces event, where she and others discuss their experiences as former pit traders.

Mish shares her views on natural gas, crude oil and a selection of ETFs in this appearance on CMC Markets.

Mish talks what’s next for the economy on Yahoo! Finance.

Mish joins Bob Lang of Explosive Options for a special webinar on what traders can expect in 2023!

Rosanna Prestia of The RO Show chats with Mish about commodities, macro and markets.

Coming Up:

May 2nd-5th: StockCharts TV Market Outlook

May 15th: Real Vision Daily Briefing

ETF Summary

S&P 500 (SPY): 23-month MA 420.Russell 2000 (IWM): 170 support, 180 resistance.Dow (DIA): Over the 23-month MA-only index.Nasdaq (QQQ): 329 the 23-month MA.Regional banks (KRE): 43 now pivotal resistance.Semiconductors (SMH): 246 the 23-month MA.Transportation (IYT): 202-240 biggest range to watch.Biotechnology (IBB): 121-135 range to watch from monthly charts.Retail (XRT): 56-75 trading range to break one way or another.

Mish Schneider

MarketGauge.com

Director of Trading Research and Education

A slowdown can sometimes be a good thing. That was the general thinking behind the market when the much-awaited GDP report was released on Thursday. The data showed that the US economy grew less than analysts expected; the overall economy grew 1.1% in the first quarter of 2023, which was lower than the estimated 2.0% growth. So not strong, but it could be worse.

The stock market rallied on this news. The broader indexes closed higher, and all 11 S&P sectors closed in the green. But even though the economy is holding up better than expected, rising interest rates, tightening monetary policy, and credit tightening could result in stagnation in the second quarter. That’s because, when constraints are placed on economic resources, the consumer could get hurt.

So What Will Fuel Economic Growth?

Yield curve inversion continues to be a concern. With the credit tightening, where will the money to support economic growth come from? Until the Fed lowers the Fed Funds rate, the economy could slowly decelerate; that’s not likely to happen when the Fed meets in May. The CME FedWatch tool, as of this writing, shows approximately 81% probability of a 25 basis point interest rate hike.

So if there is a 25 basis point hike in May, credit card rates may go higher, as will mortgage rates, auto loans, and personal loans. This would burden consumers, which could slow down consumer spending.

Inflation could continue to slow down, but a lot could surface in the next few months. For one, the labor market is still strong despite showing signs of cooling. Jobless claims continue to drop even though we hear about so many layoffs. There’s a chance that those laid off from tech companies received severance pay, which could keep them going for a few months. So the effects of the layoffs may surface in the future.

And let’s not forget that the banking crisis is still simmering. The Fed just reported that the failure of Silicon Valley Bank (SVIB) had to do with internal mismanagement. The fiasco shows weakness in regulation, and measures will probably be taken to make changes, but that’s not likely to happen immediately.

It’s Not All Gloom and Doom

A big chunk of companies have reported earnings, and for the most part, big banks and big tech companies reported better-than-expected earnings. Strong earnings from Microsoft (MSFT), Alphabet (GOOGL), and Meta (META) helped reignite investors’ appetite for big tech.

Energy earnings are also coming in. Despite the fall in crude oil prices, Exxon Mobil (XOM) and Chevron (CVX) reported better-than-expected earnings.

The S&P 500 index ($SPX), Dow Jones Industrial Average ($INDU), and Nasdaq Composite ($COMPQ) are getting pretty close to their February highs. The S&P 100 index ($OEX), which represents a significant percentage of large-cap stocks, has broken out above its February high and its more recent April 18 high. If $SPX, $INDU, and $COMPQ see a similar scenario play out, it could be time for investors to get excited about the stock market.

The daily chart of $OEX below suggests that large caps have been showing strength and could continue higher, hitting their August high of above 1,900. The index is above its 50-, 100-, and 200-day moving average, and all three moving averages are in an upward-sloping trend.

CHART 1: S&P 100 INDEX ($OEX) UPWARD AND ONWARD. A series of higher lows and a breakout above its February high puts $OEX ahead of other indexes.Chart source: StockCharts.com. For illustrative purposes only.

End-of-Week Wrap Up

$SPX up 0.83% at 4169.48, $INDU up 0.8% at 34,098; $COMPQ up 0.69% at 12226.58$VIX down, closing at 15.78 (last time VIX hit this level was at the end of 2021)Best-performing sector for the week: Communications ServicesWorst-performing sector for the week: UtilitiesTop 5 Large Cap SCTR stocks: Meta Platforms (META), Nvidia (NVDA), Gold Fields (GFI), AngloGold Ashanti (AU), Wynn Resorts (WYNN)

On the Radar (Week of May 1)

ISM manufacturing/Construction spending (Monday, May 1)JOLTS Job Openings (Tuesday, May 2)Federal Reserve Interest-rate statement and presser (Wednesday, May 3)US employment report/Consumer credit (Friday, May 5)Lots of earnings—some notable ones are Apple (AAPL), Advanced Micro Devices (AMD), Pfizer (PFE), BP Amoco (BP), Ford Motor (F), Uber (UBER)

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

An interesting Seasonality Timing System was developed by Yale Hirsh of the Stock Trader’s Almanac. It was based upon the observation that stock market seasonality is broken into two six-month periods. The favorable period begins on November 1 and ends on April 30. The unfavorable period begins on May 1 and ends on October 31. The rule is that you get fully invested in stocks on November 1, then switch to T-Bills on May 1. (“Sell in May and go away.”)

There are various reasons behind seasonality tendencies. For example, summer vacations cause investors to lose interest in the market, resulting in stock prices languishing. For a thorough analysis of this phenomenon, I recommend Riding the Bear, by Sy Harding. On the original DecisionPoint website, we had one-year charts analyzing seasonality all the way back to the 1920s, and I can tell you that the system works sometimes, and sometimes it doesn’t. That doesn’t mean that we shouldn’t have an awareness of the seasonality cycles, because there is clearly something there, and it has tended to work better in “modern times.”

Looking at the most recent one-year period, we can see that both the favorable and unfavorable periods delivered profits on a strictly mechanical basis, but the ride got pretty rough at times. I have added a panel with the Silver Cross Index*, one indicator which could be used to refine entry and exit points, rather than trying to “white-knuckle” it six months at a time.

Conclusion: Having studied this Seasonality Timing System over the years, I have concluded that it is better to throw in a little brain power, rather than making decisions on a strictly by the mechanical basis suggested by the model. With the beginning of the unfavorable period, I will keep in mind that negative seasonality is one thing that will be working against long positions for the next six months, but I will rely primarily on our indicators for our analysis and decision making.

*The Silver Cross Index shows the percentage of stocks in a given index that have the 20-day EMA above the 50-day EMA, which is a bullish sign in the intermediate-term.

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On this week’s edition of Moxie Indicator Minutes, TG takes you inside the Moxie Indicator trading room to show you how he’s been navigating this week of large up and down moves. It has been a fun and interesting several days as the market twists itself into a pretzel, but TG has managed to stay with it and accurately take trades that have captured both the short, then long, sides of the market.

This video was originally broadcast on April 28, 2023. Click this link to watch on YouTube. You can also view new episodes – and be notified as soon as they’re published – using the StockCharts on demand website, StockChartsTV.com, or its corresponding apps on Roku, Fire TV, iOS, Chromecast, Android, and more!

New episodes of Moxie Indicator Minutes air Fridays at 1:15pm ET on StockCharts TV. Archived episodes of the show are available at this link.

Earnings news from big cap Nasdaq stocks like Microsoft (MSFT) and Meta (FB, used to be Facebook) have been pushing up the capitalization-weighted indices, as well as the share price of QQQ, the ETF which tracks the Nasdaq 100 Index. In those cap-weighted indices, the behaviors of the big-cap stocks matter a whole lot more toward the calculation of the index value. But the behaviors of the other components can tell us more about the health of the liquidity available to lift all stocks.

The ETF QQEW owns the same stocks as QQQ, but weights them all equally, as opposed to by total capitalization. Most of the time, QQEW does the same things that QQQ does, which is what you would expect. But sometimes they disagree, and, when that happens, the message from QQEW usually ends up being right about where both ETFs are headed.

This is relevant right now because, in early 2023, QQEW has shown us a bearish divergence, making a lower price top even though QQQ has made a higher price top. QQEW has also broken its rising bottoms line, then pulled back up to test the underside of it. QQQ, by comparison, is sailing along happily above its equivalent uptrend line, blissfully ignorant of troubles among the lesser components.

Within this week’s chart, I have highlighted a couple of other notable divergences between QQEW and QQQ. If the chart were to show data further back in time (which would involve cramming in more data, making it difficult to see), we could find even more of these divergences.

The reason why comparisons like this one, or comparisons between a major index and an Advance-Decline Line, can be useful is that the big cap stocks will not detect liquidity problems as well as the lesser issues. I liken this to the way that a healthy sow can nurse a whole litter of piglets really well.

But if she is a poor milk producer, the biggest piglets may be able to muscle their way in to get the milk they need, while the runts will go hungry. Eventually that poor milk production can affect the big piggies, but watching the health of the runts is going to give a better message about milk production.

So it goes with the stock market. The big-cap tech stocks are the big piggies, able to muscle their way in to get buyers during a condition of poor liquidity. But the runts of the stock market will suffer first, and this shows up as weaker performance for things like small cap stocks, and high yield bonds. It also shows up as differential performance among the component stocks of an index like the Nasdaq 100. The message of the current divergence is that liquidity is poor, which is a message that the behavior of Microsoft and Meta will not convey until much later.