One chart that explains the performance of the U.S. stocks in the broader markets over the last 12 months – What we see below is a comparison of two ETFs: SPDR S&P 500 ETF trust (SPY) v/s Invesco S&P 500 Equal weight ETF (RSP). The reason we’re doing this comparison is to understand if the performance of the market has been broadly distributed over the last 12 months. It clearly isn’t. While SPY has given a positive return of 19%, RSP on the other hand has barely been able to generate a meager 2% return. That shows the skewness of the mega cap stocks in the S&P 500, namely MAG-7 (magnificent seven). Usually for a bull market to end, it is the other way round wherein small caps outpace their larger peers, which is clearly not the case here. At least not yet.
When we look at the way benchmark indexes have been performing since last few months, it seems that everything is fine, the economy is doing good (many macroeconomic numbers say that too). But when we look under the hood and smaller stocks, we see these gains are fairly skewed towards bigger companies as against the broader market.
Not only has the performance been skewed towards those mega caps, among the developed markets too, its only been the story of the U.S. markets while all the other major developed markets haven’t given as healthy returns, as visible in the chart below that compares Vanguard FTSE Developed Markets ETF (VEA) vs the SPY:
If that wasn’t enough, here’s the comparison with Emerging Markets, Vanguard FTSE Emerging Markets ETF (VWO) v/s the SPY and that turns even more skewed towards the SPY, with the VWO giving negative 6% returns as against 18% for the SPY in comparison.
What should one conclude based on what we see? How does this anomaly get corrected? Would we see U.S. markets falling to match the performance of other markets or is it going to be other way round wherein all the other markets would start playing the catch up? If its the former, then we certainly have to be cautious on our positioning. But what if its the latter? What if all the other markets start catching up with the U.S. markets? In that case we have a lot of opportunity to make money.
Lets look at some of those markets individually and see what we get?
Vanguard FTSE Developed Markets ETF (VEA) – Daily Candles: Here’s the daily candlestick chart of the Vanguard FTSE Developed Markets ETF (VEA) and it looks promising. There is bullish inverse Head and Shoulders pattern developing that’s sitting on the cusp of a breakout. If and when that happens, we should be able to see some fireworks in other major developed markets that would do catch up with the U.S. markets.
iShares Core MSCI EAFE ETF (IEFA): Another ETF with developed markets as its core, barring North America – and it displays the same thing – Bullish Inverted H&S. That makes me go hmm!
iShares Russell 2000 ETF (IWM): Russell 2000 which is an index smallcap stocks in the U.S. has long been lagging in this rally. Many have been questioning the varasity of this rally itself due to the fact that yes this rally isn’t broad based. Even I have been mentioning this in my posts, time and again, that unless smallcaps participate, this rally can’t be broad based and a sustained one. But looks like small caps are on the cusp of joining the bandwagon too. What we see below is another bullish inverted H & S formation, wherein right shoulder is yet to complete, but is all set to had higher towards the neckline.
iShares core S&P mid cap ETF (IJH): Not only the small caps, even midcaps have been lagging and similar pattern here as well. Do not be surprised if we do see them joining the floor in the next few days.
Vanguard Growth ETF (VUG): Interestingly VUG, the growth stocks’ ETF, is sitting at a double top – All time high and there can be some scale back from these prices. Just like all the other key indexes, even VUG has rallied after breaking out of the cup and handle pattern and it probably is time for some consolidation/scaling back.
Keeping all the rationality of valuations and macroeconomic concepts aside, while benchmark indexes have rallied as if there is no tomorrow, this rally is still incomplete without mid caps and small caps participating. Even global stocks have lagged their U.S. peers and it could end in one of those two ways – either U.S. benchmark indexes get sold into or all the others start contributing. Looking at their charts, it does look like there is some rally in the offing for small, mid caps in the US and global markets too. What about the benchmarks here? Let’s take a deep dive in here as well:
S&P 500 futures (Monthly): I have said this in the past and more recently in the year-ahead post (read here) as well that there is every likelihood, markets would form a negative divergence on the monthly candles before selling-off. Those divergences are here, barring a few, namely – IXIC (Nasdaq Composite) and RTY (Russell 2000). Can markets start selling-off without these two key indexes forming a new all time high and without them showing any divergence? I would doubt that.
Nasdaq 100 (Monthly):
Dow Jones Industrial Average (Monthly):
Nasdaq Composite (IXIC) – Monthly candles:
Russell 2000 Small Cap Index (RTY – Monthly candles):
Conclusion: While it is easy to get bearish here on the benchmark indexes here, the broader market seems to disagree at the moment. Can we sell-off without broader participation? Yes we can, but the charts disagree at the moment and it would take some more time and efforts for markets to correct the impending anomaly. In fact if based on the monthly candles, markets have to resume a broader sell-off that mimics (or surpasses) the 2022 sell-off, then Nasdaq Composite and US Small caps have to join the bull run before we can down the curtains. As I have said in the year-ahead outlook post, there is probably yet another euphoria pending in the market. A euphoria wherein the previous one would pale in comparison. It probably is THAT time already where euphoria begins.
Macro micro trader 
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