There appears to be a lot of angst, at least if you go by the headlines in major news organizations and Wall Street bank comments, about the increasing concentration of the stock market rise.

Narrow Mkt Rise Fuels Angst; We Expect Cyclicals To Join Rally
Bloomberg

The FAANG+ stocks, defined roughly by Facebook (FB), Amazon (AMZN), Alphabet (GOOGL), Apple (APLN), Netflix (NFLX) and Microsoft (MSFT), plus Tesla (TSLA) and Nvidia (NVDA) were about $8 trillion in market cap as of July 10, or 24% of all US stocks market cap and 29% of the Standard & Poor’s 500 index (SPX). Wow.

Here’s a sample of some of the scarier headlines:

1 Goldman Sees Imminent Momentum Crash As All S&P Gains Come From Just 5 Stocks;

2 This Is Nuts… Again. Reducing Risk As Tech Goes 1999;

3 Tech titans’ market heft could signal broader stocks worry;

4 The stock market is looking like the Dot Com Bubble again, with market cap super concentrated in five companies. But this time it’s worse;

5 Only a Handful of Stocks Are Helping the Market Rally. Why That’s a Bad Sign;

6 Top heavy returns showed 3 stocks — Amazon, Netflix and Microsoft — alone make up more than 70% of the gains in the S&P 500 and Nasdaq 100 indexes.

Forgive me, but I’ve tricked you.  Just No. 2 is recent.  The rest of the headlines date anywhere from several months back to two years ago (No. 6).

The comparisons to 1999 keep coming: One well known trading site noted that Monday the Nasdaq 100 rallied more than 2% intraday to set an all-time high, then reversed to close down by more than 1%. The only other time that happened was March 7, 2000.  Cue the scary music.

Don’t ignore a narrow rise, but alone it doesn’t  tell you much about whether the market is going higher or lower. It might be that the stocks involved are overbought and will drop, and that might or might not lead to other stocks falling. Or it might be that they are expected to produce very strong earnings compared to the rest of the market. In the case of Tesla (TSLA) in particular, there is apparently a large retail contingent jumping into the stock through Robinhood trading platform. That’s another story.

I’m not trying to be facetious.  Yes, narrow breadth is something many investors might consider worrisome. But my point today is that market concentration is a regularly recurring issue in bull markets. I’m not trying to disparage any particular source of information above. What I am saying is step back, look at what is happening, look at the future earnings possibilities post-coronavirus (COVID-19) and look at the history.

Let’s look at history courtesy of Advisors Capital Management, a money manager which published an interesting report Monday. “The equal-weight S&P 500 (not market cap weighted) is down -10.6% year-to-date, while tech-heavy NASDAQ is up +19.0%. Obviously, performance in 2020 has been concentrated among the mega cap stocks. We are hearing a lot of angst-ridden commentary and handwringing among investors regarding this top-heavy risk, but is this necessarily a cause for alarm?”

Narrow Mkt Rise Fuels Angst; We Expect Cyclicals To Join Rally
ACM Wealth

“In a word, no. This concentration is not unprecedented. (My italics.) The  chart on the left shows the long-term concentration in the US stock market for three groups: the single largest company, the top five, and the top ten.  Clearly, when looking at recent history, we are at a high in concentration at the top. Looking longer, though, it becomes clear that most of the market’s history has been highly concentrated. By itself, this level of concentration is not a concern.”

That’s the key: “by itself.”  So what can we say about this market concentration? Let’s examine the NASDAQ 100 phenomena Monday from that well-known trading website. The sample size of that scary statistic is now 2 data points. I’m not sure how much one can glean from such a tiny data sample. It’s interesting but is it indicative? Can’t say.

Robert Sluymer, our head of technical research, says given reacceleration in growth stocks since June 8, a short-term correction is likely underway. But it’s too early to tell if that action defined a long-term peak for them. He expects leadership to ebb and flow between growth and cyclicals through 2H20, and that a rotation away from growth toward value/cyclicals is likely developing.

 The Nasdaq 100 (NDX) established an outside reversal day on Monday, which probably marked a short-term peak for growth stocks following the surge since June 8. In general, Sluymer doesn’t recommend chasing those mega-cap growth stocks right now and says that there could be lower entry points later in this quarter. After such a run, the megacap FAANG+ stocks look like a crowded trade.

In contrast, cyclicals have been correcting since June 8 and are showing early signs of bottoming at key support near 50-day moving averages heading into earnings season. His contrarian ideas include unpopular cyclicals such as Citigroup (C); Bank of America (BAC); Goldman Sachs (GS); Morgan Stanley (MS); Wynn Resorts (WYNN); Las Vegas Sands (LVS); Caterpillar (CAT); Deere (DE), and AGCO (AGCO), as examples of bottoming patterns following six-week corrections back to support at 50 DMA’s. You can find additional “Epicenter” recommended stocks on our website.

 Sluymer expects the SPX will hold key support near its 50- and 200-day moving average on near-term weakness and is more likely to consolidate in Q3 than break to lower lows. A break below the 50-dma by the Russell 2000 and most cyclicals in general would be needed to change our bullish view.

In other words, just because Tesla seems overvalued, it doesn’t mean the market is. Indeed, given how lackluster all those stocks outside the FAANG+ have done, we view the Epicenter stocks as those with EPS leverage next year, as my colleague Tom Lee has written about extensively.

Where I could be wrong: While we believe that the US economy is slowly recovering, a huge collapse in FAANG+ stocks could undermine market confidence in general.

Bottom Line: Market concentration might or might not be a bad sign, but it occurs more often than most investors think.

Prior “Signals”

    
DateTopicSubject / TickerThe Signal
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6/24/20StockLam Research, Applied MaterialsLam Research, Applied Materials Set to Reap IoT Harvest
6/17/20StockNordic Semiconductor (Nod.NO)Continued IoT Growth Good News for Nordic Semiconductor
6/10/20StockHelmerich & Payne (HP)Helmerich & Payne Stock Could Energize Your Portfolio
6/3/20OptionsVan Hulzen Asset ManagementFor Income Seekers, Why Covered Calls Top Junk Bond ETFs
5/27/20StockJP Morgan Chase (JPM)Why JPMorgan Chase Belongs in Portfolios Post-COVID-19
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5/13/20StockBank OZK (OZK)‘Plain Vanilla’ Bank OZK Could Be Long Term Opportunity
5/6/20StockGraham Holdings (GHC)Post COVID-19, Graham Holdings Could Return to Growth
4/29/20StockPacira (PCRX)Pacira To Benefit from Surgery Trend Away from Opioids
4/22/20StockAvalara (AVLR)Avalara Stock Could Benefit from Catalysts Boosting Amazon
4/15/20StockFirst Republic (FRC)First Republic Stock Looks Cheap in Post COVID-19 World
4/8/20StockGalapagos (GLPG)If Galapagos Arthritis Drug Is Approved, Stock Looks Cheap
4/1/20StockDaVita (DVA)In Uncertain Markets, DaVita’s Stable Rev/EPS Look Attractive
3/25/20Q&AInsiderInsightsIn Roiled Market, Insider Activity Could Offer Directional Clues
3/18/20MarketUS Stock MarketMarket Discounts Recession; GDP, EPS Growth Worries Mount
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