In this Investor Insights market commentary, there will be three points of discussion. First, we will update you on some of the points we have made in our recent updates. Then, we will feature two charts this week: the Russell 2000 and the Biotech Sector. Our bottom line will sum all these points up by discussing the holdings of our proprietary portfolio management model, the Portfolio Thermostat.
Updates on Recent Market Comments- Technology Stocks, Tesla, and Sentiment
Tech Stocks
Markets are still extended following the parabolic run-up experienced late last year. While markets sold off in the first week of the new year, which we stated was likely, the “Magnificent 7” stocks led a bounce last week. Stocks, like Nvidia, Meta, and Microsoft saw the most significant rises. Keep in mind that these stocks saw some of the largest rises in 2023, that preceded substantial losses in 2022. Keep in mind that these stocks could be more prone to seeing some pullbacks after being extended.
Tesla
In our first update of the new year, we featured Tesla as our chart of the week. The commentary stated that Tesla was at the upper end of its “triangular” trading range and that we were looking for it to break out on high volume, but instead resistance held, and Tesla has gone lower since. It is now at the lower end of that triangular trading range and could bounce some, if support holds.
Source: Canterbury Investment Management. Chart produced using Optuma Technical Analysis Software. Security shown is TSLA, Tesla Stock
Sentiment
Market sentiment was unchanged last week, with nearly 50% of individual investors holding bullish outlooks on the market. This is according to the AAII investor sentiment survey. Sentiment is a contrarian indicator, meaning markets tend to do the opposite of what the herd expects. Right now, a significant number of investors are bullish.
Chart (1) of the week: Small Cap Stocks
One of the more interesting areas of the market right now is small cap stocks, or the stocks of smaller capitalized companies (typically less than $2billion of market capitalization. An example would be a stock like Spirit Airlines or Laz-Z-Boy Furniture). Small cap stocks are represented by the Russell 2000 index, which is an index composed of 2000 small cap companies.
The Russell 2000 index attempted to break out of some long-term resistance but appears to be failing. Refer to the chart below and its corresponding numbered points.
Source: Canterbury Investment Management. Chart produced using Optuma Technical Analysis Software. Security shown is IWM, a Russell 2000 ETF.
1. The black line drawn across the index’s peaks represents longer-term resistance. This has been a point of contention where sellers have typically taken over and forced the index lower. In December, the Russell broke above resistance, but only briefly. The Russell 2000 then tested the resistance level for support, but failed, and “gapped” down through the level. This is a negative.
2. At the Russell’s recent peak, the MoneyFlow Index (lower half of chart) put in a lower high, which is called a “negative divergence.” MoneyFlow is a volume-based indicator which measures where “smart” money is flowing. At the Russell’s recent peak, there was less “smart” money flowing into the index than there was at prior peak levels.
3. Not shown in the chart, but the Russell has been volatile during the first few weeks of the new year. The index’s volatility, as measured by the Canterbury Volatility Index, is twice as much as the S&P 500.
Chart (2) of the week: BioTech
Biotech stocks have been some of the better performers recently. The chart below shows the Biotech industry ETF. For commentary on Biotech, refer to the chart and its corresponding numbered points.
Source: Canterbury Investment Management. Chart produced using Optuma Technical Analysis Software. Security shown is XBI, a Biotech Industry ETF.
1. Biotech is attempting to break out of a trading range, after experiencing a large run-up. The industry has shown positive relative strength in 2024 but is at a zone of resistance. We will see if it can break through and hold this level.
2. Unlike the Russell 2000 index, which showed a negative divergence with the MoneyFlow index, Biotech’s MoneyFlow has been strong and is at a higher level than it was at the previous peak. The volume in the ETF has been higher, and to the upside.
3. Not shown in the chart, but many individual Biotech stocks are highly rated and ranked on our technical lists. More on that in the bottom line.
Bottom Line- Portfolio Management
This update discussed three main points: technology stocks, the recent weakness of the Russell 2000, and the recent strength of the Biotech industry. Now, let’s discuss each of those points in the context of portfolio management and the Canterbury Portfolio Thermostat.
Technology Stocks
Technology-related stocks, and more specifically the Magnificent 7, continue to lead the markets. The Portfolio Thermostat currently owns two technology-related ETFs that give exposure to these large cap stocks. The Portfolio Thermostat owns the Information Technology Sector ETF and the Communications ETF. It was also mentioned that Tesla has headed lower off of support. Tesla is in the Consumer Discretionary Sector. The Portfolio Thermostat does not own this sector, but does own a position in Amazon, which has shown recent strength.
Small Cap Stocks
There are some technical concerns with small cap stocks, such as the higher volatility of the Russell 2000 compared to other indexes, the negative volume characteristics, and the failed break of resistance. From a portfolio management standpoint, the Portfolio Thermostat owns an inverse position in the Russell 2000, which moves in the opposite direction of the index. Diversified portfolios are meant to hold positions that have low correlations to each other. Right now, stocks and bonds are correlated, and a balanced portfolio of the two asset classes would not feel very diversified. The position in the inverse Russell 2000, and some other weaker areas, provide risk management in the current environment.
Biotech
Biotech has been one of the stronger industries recently. The industry ETF is near some resistance, but the Portfolio Thermostat holds some positions in some individual Biotech stocks. These stocks are Vertex and Amgen. The Portfolio Thermostat has held these positions since late October, and both stocks are now at new highs. They have had low correlations with the market indexes.
Closing
Keep in mind that markets are dynamic, and conditions are always changing. The Portfolio Thermostat is an adaptive portfolio strategy, designed to move in concert with the shifting market environments. Observations were made in this update based on current conditions. Those conditions may change. If they do, the Portfolio Thermostat has the ability to rotate both its holdings and allocations.