This Isn't Bearish
Investors,
The Nasdaq-100 just closed at new all-time highs relative to the Russell 2000:
Unlike the bears & perma-doomers, this is an uptrend that I’ve been rooting for because it highlights how some of the greatest stocks in the world (and tech, more specifically) are outperforming the rest of the market. As you can see, this isn’t necessarily a new phenomenon — tech stocks typically outperform during broader uptrends for the stock market!
In fact, we can take this chart a step further by overlaying the S&P 500 and calculate the 52-week (1-year) correlation coefficient between the two.
It’s not perfect (no correlation is), but there are some clear takeaways from this chart:
These two variables often have a positive correlation, implying that tech outperformance vs. small caps (NDX/RUT) is associated with a rising S&P 500. It’s uncommon for them to diverge (negative correlation) over a rolling 1-year basis.
Outperformance of the Nasdaq-100 relative to the Russell 2000 is typically associated with a bull market in the S&P 500. Therefore, bulls should cheer for NDX/RUT to rise! Take a look at the years 2000 - 2010, often referred to as “The Lost Decade” because the S&P 500 didn’t make any progress during that window. For ~90% of that period, NDX/RUT was declining. While tech started to outperform small caps just before the onset of the Great Recession, largely due to the fact that financials have an overweight exposure within the Russell 2000, the ensuing trend over the subsequent 15+ years shows us that tech outperforms small caps during bull markets for the S&P 500.
The bearish argument that “only the mega-cap tech stocks are performing well” is moot because of this data. NDX/RUT rises more often than it falls, over the long-run, highlighting how tech stocks almost always outperform the rest of the market. In and of itself, this is not bearish and I’d actually argue that it’s bullish based on points #1 and #2.
In other words, the Nasdaq-100 outperforming small caps happens during in bull markets, not bear markets.
Notice how NDX/RUT was falling during the entirety of 2022?
That was a bear market.
Notice how it’s been rising since December 2022?
We’ve been in a bull market.
The bears want to complain about the Magnificent 7. I want to own them.
By all means, complain about how Microsoft, one of the greatest companies ever, just hit new all-time highs on Friday & achieved the highest weekly close ever.
Does this look bearish to you? It shouldn’t.
We need to dispel this concept that mega-cap and tech outperformance is a bad thing, especially because mega-cap tech stocks are quite simply the greatest companies in the world. FANG+ are the MVP’s of the market, the equivalent of having LeBron James, Steph Curry, Kevin Durant, and Giannis Antetokounmpo on your team. Why is it bearish when stocks like Apple, Microsoft, Amazon, Alphabet and Meta are the best performing stocks in the market, particularly when they have a proven track-record of outperformance that corresponds with bull market trends? I’ve done my best all year to disprove the notion that tech outperformance is bad, so I hope this helps to clarify my position.
In the remainder of this report, which will be exclusive for premium members, I’ll focus on the following:
A deep-dive on S&P 500 under-the-hood metrics.
Analyzing three sectors that deserve your focus & a few individual stocks.
Positioning & sentiment data that is trading at extremes, providing a possible contrarian signal to counter-trade the data.
Bitcoin halving cycle theory.
An update on my long-term portfolio adjustments that I made this week, with explanations, and how I’m focusing on my short-term trading right now.
To read the rest of this report and enjoy the full benefits of a Cubic Analytics subscription, consider upgrading your membership by using the link below!