We have heard a lot about how the stock market is disconnected from the economy. Common sense will tell us that with record unemployment, many others taking pay cuts, lots of businesses on the brink of closing, and oil prices going negative recently.... The stock market is due for a big time pull back. I myself was in this boat for quite a while. Not so much anymore. I want to explain why.
For the purpose of this post, I am going to focus on the S&P 500 since it's the biggest and best index of the market.
First. When we have talk about "the market" we have to understand what the market is... In other terms, what individual stocks make up the S&P 500. I think we are all guilty of not really understanding the mix and weighting of the market these days. I know I was. I still think of big oil and big industry as being a major portion of the S&P. Maybe 10-15 years ago. Below is a great breakdown of the S&P 500 in 2008.
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You can see that in 2008 energy and industrials were big chunks of the pie. Fast forward to today and that is no longer the case.
View attachment 16237
In fact, as of today Microsoft alone is nearly twice the size of the entire S&P 500 energy sector weighting. If you dig further into the individual components. The 5 biggest companies in the S&P 500 are Microsoft, Apple, Amazon, Google, and Facebook. Combined they represent over 20% of the entire market cap of the S&P 500. These companies are all at or near all time highs, because when you look at this economy. We are all sitting at home on our Apple products, searching Google and surfing Facebook for new things we can buy from Amazon. Unless of course we are working in our Microsoft Windows based systems or playing Xbox.
Then if you factor in the other big sectors of healthcare and communication services, only the financial sector is under current pressure among the bigger portions of the S&P.
Now let's talk about the Fed and stimulus. The Fed has printed several trillion dollars that benefit the market and several more to make sure most people affected by the shutdown are going to make as much if not more than they would at work. What are these people spending that money on? Let's just say not a whole lot is going on with small business these days.
Which brings me to the biggest issue. Over the long term, big business for the most part is going to survive this. Small businesses will not fare so well. Currently about 45% of GDP runs through small business. If the govt prints enough money to make the average consumer whole. And 15% of small businesses go under... It stands to reason bigger public companies are going to be the beneficiaries.
You can see that this even applies within the public market itself. Below you will see a chart that overlays the S&P 500 which are the big public companies vs the Russell 2000, the smaller public companies. You can see how much more money has been pumped into the bigger companies in comparison to the smaller ones.
View attachment 16231
Another chart that is interesting is the QQQ. This the Nasdaq 100 which is effectively a big cap tech heavy index without financials. The S&P is the red line again and you will see how much the S&P is trailing this group of 100 stocks. Many of the QQQ stock are also in the S&P 500, but not all. Tesla and Zoom come to mind as a couple that are not in the S&P 500 because they don't meet the profitability requirements yet.
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So that brings me to my final chart. What is holding the S&P 500 back. Well it's the financial sector. It's big piece of the S&P as you saw earlier and it's still lagging as you will see in this chart.
View attachment 16234
The financial sector is actually underperforming the Russell 2000 at this point. So what does this mean? Well, the ticket symbol for the sector is XLF. This the canary in the coal mine so to speak on when the market is going to take the next step forward. Obviously people are down on the financials because of the Fed and the ultra low or even negative interest rate potential. But I am fairly confident in one thing, the banks will figure out how to make their money soon enough... They kinda write all the rules.
Overall I am posting this because I don't want everyone sitting on the sidelines waiting for a big pullback if this market runs up to an all time high in the next 5-6 months. We are currently in a range between 2790 and 2972 (chart below.) We will break through one side or the other and it's really looking like the upside as of now. If we do, 3100 may be the next area of resistance.
I am personally keeping an eye on everything and I checking out when we hit resistance lines until we break through. I am not discounting downside risk. But I have spent the last week researching the bull argument and it is strong too.
View attachment 16235
For the purpose of this post, I am going to focus on the S&P 500 since it's the biggest and best index of the market.
First. When we have talk about "the market" we have to understand what the market is... In other terms, what individual stocks make up the S&P 500. I think we are all guilty of not really understanding the mix and weighting of the market these days. I know I was. I still think of big oil and big industry as being a major portion of the S&P. Maybe 10-15 years ago. Below is a great breakdown of the S&P 500 in 2008.
View attachment 16236
You can see that in 2008 energy and industrials were big chunks of the pie. Fast forward to today and that is no longer the case.
View attachment 16237
In fact, as of today Microsoft alone is nearly twice the size of the entire S&P 500 energy sector weighting. If you dig further into the individual components. The 5 biggest companies in the S&P 500 are Microsoft, Apple, Amazon, Google, and Facebook. Combined they represent over 20% of the entire market cap of the S&P 500. These companies are all at or near all time highs, because when you look at this economy. We are all sitting at home on our Apple products, searching Google and surfing Facebook for new things we can buy from Amazon. Unless of course we are working in our Microsoft Windows based systems or playing Xbox.
Then if you factor in the other big sectors of healthcare and communication services, only the financial sector is under current pressure among the bigger portions of the S&P.
Now let's talk about the Fed and stimulus. The Fed has printed several trillion dollars that benefit the market and several more to make sure most people affected by the shutdown are going to make as much if not more than they would at work. What are these people spending that money on? Let's just say not a whole lot is going on with small business these days.
Which brings me to the biggest issue. Over the long term, big business for the most part is going to survive this. Small businesses will not fare so well. Currently about 45% of GDP runs through small business. If the govt prints enough money to make the average consumer whole. And 15% of small businesses go under... It stands to reason bigger public companies are going to be the beneficiaries.
You can see that this even applies within the public market itself. Below you will see a chart that overlays the S&P 500 which are the big public companies vs the Russell 2000, the smaller public companies. You can see how much more money has been pumped into the bigger companies in comparison to the smaller ones.
View attachment 16231
Another chart that is interesting is the QQQ. This the Nasdaq 100 which is effectively a big cap tech heavy index without financials. The S&P is the red line again and you will see how much the S&P is trailing this group of 100 stocks. Many of the QQQ stock are also in the S&P 500, but not all. Tesla and Zoom come to mind as a couple that are not in the S&P 500 because they don't meet the profitability requirements yet.
View attachment 16232
View attachment 16233
So that brings me to my final chart. What is holding the S&P 500 back. Well it's the financial sector. It's big piece of the S&P as you saw earlier and it's still lagging as you will see in this chart.
View attachment 16234
The financial sector is actually underperforming the Russell 2000 at this point. So what does this mean? Well, the ticket symbol for the sector is XLF. This the canary in the coal mine so to speak on when the market is going to take the next step forward. Obviously people are down on the financials because of the Fed and the ultra low or even negative interest rate potential. But I am fairly confident in one thing, the banks will figure out how to make their money soon enough... They kinda write all the rules.
Overall I am posting this because I don't want everyone sitting on the sidelines waiting for a big pullback if this market runs up to an all time high in the next 5-6 months. We are currently in a range between 2790 and 2972 (chart below.) We will break through one side or the other and it's really looking like the upside as of now. If we do, 3100 may be the next area of resistance.
I am personally keeping an eye on everything and I checking out when we hit resistance lines until we break through. I am not discounting downside risk. But I have spent the last week researching the bull argument and it is strong too.
View attachment 16235
