Momentum Monday – 2021 Is A Poster Year For Indexing and Cathie Wood Made Me Do It!
Courtesy of Howard Lindzon
Good morning…
The indexes continue to hide a mess in a lot of the tech stocks…which is the best advertisement ever for indexing.
Let’s get right to this weeks Momentum Monday. You can watch or listen to it here and I have embedded it below on the blog:
Here are Ivanhoff’s notes:
The market has been telegraphing the Covid threat for the past three weeks. The recent acceleration in big tech stocks’ ascent and the decimation of the so-called reopening industries have been clear signs and we often talked about.
The Fed has changed its interpretation of inflation and this is wreaking havoc in the high-growth, high-momentum world and a scare in the rest of the stock market. The vast majority of momentum names that tripled and quadrupled last year are in the midst of 30%+ drawdowns. The small-caps index Russell 2k is near the bottom of its range since February while adding multiple distribution days just in the past couple of weeks. The large-caps S&P 500 and the Nasdaq 100 managed to close the week barely above their 50-day moving average but are also looking vulnerable to further downside especially if they lose their Friday’s lows. The main indexes are in a correction mode. The most common-sense strategy for active market participants in this market environment is to either focus on intraday setups or sit on the sidelines with a large cash position. There are still plenty of opportunities for the nimble. In fact, corrective markets are active traders’ paradise because of the elevated volatility. Granted intraday trading is not for everyone and there is nothing wrong in taking the occasional mental break from the market and coming back recharged and ready to ride the next market rally aggressively.
In the meantime, there are more Covid-related restrictions around the world as the Omicron mutation is spreading quickly. We still don’t know enough about its death rate and the current vaccines’ protection rate against it. It seems at this point the market is more worried about Fed’s tightening policy than the virus. The narrative has changed. Covid used to be favorable for tech stocks because it meant more liquidity from the Fed. Lately, a new Covid threat means that the Fed will worry about inflation due to supply chain issues. This is why the same playbook from last year is not working now.
If you are an indexer, 2021 is another great year. The $QQQ over $SPY investment that I have preached here for years continues to work well.
Ben Carlson explains it well with ‘Market Cap Rules Everything‘. The gist:
But for now really the only thing that matters to the overall market is the biggest stocks. The top 20 stocks by market cap make up around 35% of the index. This is the tail that wags the dog.
The market doesn’t really care if all of the other stocks are getting killed…yet.
The ‘We Are All Cathie Wood’ trade that the media droned on about as 2021 ended through March of this year has imploded. Michael Batnick has a great breakdown of the mess.
If you are not indexing, the relative strength in the market is to be found in Apple, Procter and Gamble, The Homebuilders and The Semiconductors.
As for my other regular Monday links:
Here is Charlie’s 7 chat Sunday.
Here is the Stocktwits 25 momentum lists.
Have a great week.
Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. For full disclosures, click here.
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