Before the last market plunge, the small cap fund started sliding first. If we look at recent market action, small caps are under-performing large caps. But if we back up a bit on our charts and consider the seasonal tendencies, then the recent action may not be a negative signal.
I think the market is grossly over-valued and high risk, but I do not see the same market warnings as last December. The market could still pullback and it definitely appears to be transitioning to a sideways pattern for some unknown duration. But we are not seeing signs of immediate distress.
While seasonal tendencies may explain some of the divergence early in the year, we need to watch these factors closely over the next month now that the market is overbought and at overhead resistance. Conditions can always change rapidly of course. And if the divergence continues, then the chances of a pullback in the SP500 increases.
We do see other signs of divergence at the sector level. If you take tech out of the SP500 index, you lose much of the gains this year. The market does not seem to care that 58% of tech’s revenue comes from overseas where the global economy is slowing down. It might be pricing in a weaker dollar.
Communication Services now includes Facebook and has also been doing well lately. Healthcare has caught the Bernie medicare-for-all cough. But tech’s market action is the most interesting.
Tech makes up 21% of the SP500 weighting – the largest sector in the SP500. What is up with the straight lining higher with no bumps? It looks the same with the Nasdaq average – like some computer program is running the market higher. Especially the largest 100 companies traded on the Nasdaq.
Microsoft is the only company of the largest five to exceed its 2018 high so far in 2019 and is now the most valuable company listed. Why? Probably because Microsoft has fewer risks to its future revenues than the others. (Facebook & Google – privacy & foreign taxes, Apple – slower iphone sales & trade war, Amazon – higher revenue but no profits)
We also see the SP500 mega companies are pushing higher while the other 450 companies in the SP500 started pulling back two weeks ago. A small divergence to watch.
And let’s see what the central banks do this time. China is telling us they are tapped out on the credit creation thing. No more global saves. We’ll see what the other central banks can print and buy. Because it matters more than profits and the economy this cycle.
No strong signals either way as of 22 April. But much to watch. Last year corporate buybacks levitated the markets higher over the summer to see them give it all back in the Fall.
I don’t think the roller coaster ride is over and the really big drops are still ahead of us.
Invest safe, invest smart.
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