During market commentaries this year, we have been talking a lot about the technology-related sector leadership and the significant impact it has on the markets. During May and June, markets were almost exclusively being led higher by technology, In mid-June, we titled one of our commentaries “Market Breadth Weakens as Technology Rises.”
In recent weeks, we have seen the opposite. In fact, you could title this commentary “Market Breadth Strengthens as Technology Falls.” Since the Nasdaq 100’s peak on July 10th, the Nasdaq (an index mostly composed of tech stocks) is down -8%. The technology-skewed S&P 500 is down about -3%, but the average S&P 500 stock (or equal weight index) is up almost +3%. While the market index has been falling the last few weeks, most stocks are rising.
Are we seeing a shift away from technology-related stocks? In the short-term, the answer is “yes.” Many technology stocks have pulled back and have lost momentum. The hottest stock talked about this year has been Nvidia. Nvidia is down -16% in just the last eight trading days. Meta and Google are each down about -12.5% over that same timeframe. In addition, Tesla rose +33% from July 1st to July 10th, but has fallen nearly -17% since then. Tesla is a stock that has no idea where it wants to trade.
The Average Stock is Rising
While technology stocks are losing momentum, most stocks are gaining it. According to our risk-adjusted sector rankings, Financials is the number one ranked S&P 500 sector. The rise of Financials has boosted small cap stocks. Unlike the S&P 500, which has more than 40% of its exposure to technology-related securities, the Russell 2000 index has its largest exposure to Financials. It’s second largest is Industrials. These two areas have been strong recently.
Per Canterbury’s Volatility-Weighted-Relative-Strength rankings, Financials is ranked 1st, Utilities is 2nd, and Real Estate and Healthcare round out the top 4. These sectors have all been near the bottom of the sector rankings at some point this year. The technology-related sectors, which are Information Technology, Communications, and Consumer Discretionary, are now near the bottom of the rankings.
Look at the chart below. It shows the equal-weight S&P 500 index, which paints an image of what the average S&P 500 stock is doing. You can see that for most of this year, the index has been putting in a series of lower highs and higher lows. This means that the battle between supply and demand is getting tighter and tighter, forming a “triangular” pattern and waiting for one side to win out. Recently, the index broke out and set a new high-water mark.
Source: Chart created Canterbury Investment Management using Optuma Technical Analysis Software
Bottom Line
Over the last few weeks, there has been a definite shift away from technology stocks and into other areas of the market. While the average stock has risen in the last few weeks, several large technology stocks have dragged and pulled capitalization weighted indexes down.
Our Canterbury Portfolio Thermostat methodology continues to adapt its portfolio holdings and allocations to accommodate changing market conditions. As sector and security leadership rotates, the portfolio adapts to new market environments- bull or bear.
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