“I’m waiting for something to happen, Bob. I’ve been waiting for weeks. Something’s gotta give. That’s what one beaten-down options trader said to me last week. For many active traders, it’s not so much the slow bleed down in most stocks. It’s the lack of action. Low volume. Low volatility. Ridiculously narrow leadership. Such is the market these days. With the S & P 500 down 1% this month, and essentially flat for the quarter, the best you can say is that the overall trend has moved from down in 2022 to mostly sideways in 2023. There are certainly pockets of strength, but even those pockets of strength are a bit suspect. It’s rare when a really big ETF is the star, but you’d have to give five stars to the Invesco QQQ Trust (QQQ), which tracks the Nasdaq-100. It’s the fifth largest ETF, with $176 billion in assets under management, is up 21% this year, has outperformed the broader S & P 500 almost the entire time and still has stronger momentum than the S & P. Yet, even with this tech powerhouse, there are worrisome signs. Lowry, the nation’s oldest technical analysis service, has taken to calling the rally in tech “the mega-cap mirage.” Lowry notes that, even as the Nasdaq-100 has been advancing, there is now a negative divergence in the Nasdaq-100 advance-decline line, “an extraordinarily rare occurrence,” Lowry noted. “This means that even among the elite 100 largest stocks in the Nasdaq Composite, more have been falling than rising over the last three months,” Lowry said. This is true in tech sub-sectors as well. Modest strength in Micron, AMD and Nvidia this quarter, for example, has masked serious declines in STMicro (down 20%), Intel (down 11%), and Taiwan Semi (down 10%). Even Apple suppliers like Qualcomm (down 17%) and Skyworks (down 17%) aren’t being spared. Still, if you own the QQQ or other broad tech indexes, you are still a happy camper, and with good reason. Over the weekend, Goldman Sachs’ David Kostin reiterated his call that 2023 earnings would come in slightly above consensus, largely because big-cap tech would continue to outperform: “Mega-cap tech net profit margins, which drove much of the S & P 500 index’s margin weakness in 2022, troughed in 4Q 2022 and started to recover in 1Q 2023,” he said. Tech covers up a lot of ills That “mega-cap mirage” has masked a lot of problems in other sectors as well. Lowry noted over the weekend that “core indicators of market health have demonstrated significant deterioration from the early February market high through recent days.” How so? Even as the S & P 500 was near a new rally high for the year recently, the S & P Midcap 400 and S & P Smallcap 600 were 12% and 17% below their February 2nd highs last week. “This leaves the smaller-cap indexes on the brink of new multi month lows,” Lowry said. Others are also worried about the large divergences. With Technology up 21% year to date and regional banks (KRE) down 40%, “We think we are reaching the end of the runway where either banks need to begin to rally, or tech needs to fall,” Jonathan Krinsky at BTIG said in a note to clients this weekend. Only 46% of S & P 500 stocks are above their 200-day moving averages, hardly a sign of broad market strength. “This narrowing in the market rarely ends well, but clearly it has yet to end,” Frank Gretz at Wellington Shields said in a note to clients this weekend. Other factors moving the market have faded The China reopening story is a bit of a fizzle. Oil, at $70, is not far from a new low. Cyclicals sectors that reflect the broad global economy (industrials, materials, energy) are generally down for the quarter. With megacap tech leading the charge, precious little is left. At the rear of the momentum caboose is a second Invesco ETF, the Invesco S & P Low Volatility ETF (SPLV), a basket of 100 low-volatility stocks that typically includes utilities, consumer staples and health care. It underperformed in the first quarter, was a star performer in the month after the banking crisis, but it too has been sideways for the past few weeks. As for trading this week, Krinsky notes this week is options expiration, “which has been tough for markets. The SPX has been negative during the third week of May each of the last six years, and 11 of the last 14 for an average decline of -1.33%.” Note: Anna Paglia, head of ETFs and indexed strategies for Invesco and the manager overseeing both the QQQ and SPLV, will appear on the ETF Edge portion of CNBC’s Halftime Report Monday at 12:35 PM ET, along with Scott Ladner, CIO of Horizon Investments.
