The Market Mosaic 1.15.23
Breakouts are working, but will mega-cap stocks drag the market lower?
Welcome back to The Market Mosaic, where I gauge the stock market’s next move by looking at macro, technicals, and market internals. I’ll also highlight trade ideas using this analysis.
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Also, be sure to check out Mosaic Chart Alerts. It’s a midweek update covering my best chart setups among long and short ideas in the stock market, along with specific levels that would trigger a trade.
Now for this week’s issue…
Following one of the most highly anticipated reports on consumer inflation that I can remember, the stock market’s reaction was…underwhelming.
December’s CPI report matched expectations with an 6.5% increase compared to last year (chart below). There was good and bad in the report to satisfy both bulls and bears and cause a strong reaction among traders.
But the simple fact that the S&P 500 didn’t trade in a 2.7% range like in December, or a 2.6% range in November following CPI’s release…that’s a sign 2022’s volatility is leaving the stock market at least for now.
The CBOE Volatility Index (VIX) confirms as much. I written frequently in recent weeks about the importance of VIX’s 19 level, and how a move below could draw institutional flows back into the stock market. Friday saw the VIX take out that level in solid fashion, again a reminder that calmer conditions are marking the start to 2023.
Does the volatility washout mean the bear market is firmly in the rearview? Here’s what I’m watching for the market’s long-term trend and the next move in stocks.
The Stock Market Version of David Vs. Goliath
Stock market breadth is a great tool to confirm or deny the stock market’s trend. When a rally is accompanied by strong participation, that’s a sign of healthy market environment. But when fewer stocks are driving the upside, it’s time to be on watch for a trend reversal.
I anecdotally use the action on my focus list of long setups to gauge the stock market’s health as well. In the second half of 2022, high quality breakouts were few and far between. Since the start of the year, its been the exact opposite.
That’s been confirmed with another breadth measure I frequently discuss: the percent of stocks trading above their 20-day moving average. After all, I showed you how this metric flagged both December’s decline and 2023’s rally. But that’s a shorter-term trend indicator.
For the bigger picture, I turn to another breadth measure that tally’s how many stocks are making new 52-week highs relative to new 52-week lows. By creating a running tally of this figure and applying a moving average, you can track longer-term breadth trends as you can see below.
The dotted orange line is a 50-day moving average of cumulative net new highs on the NYSE, and you can see the timely cross below as the stock market was peaking at the start of 2022. But now we’re potentially seeing a crossover back above, which would be a positive longer-term signal for the market.
But here’s something else that caught my attention this weekend. The mega-cap leaders of the last bull market look incredibly weak in their current chart setups. Just take a look at several of their charts.
Compared to many of the setups I highlight in The Market Mosaic or Mosaic Chart Alerts, MSFT is nowhere near a 52-week high and has barely rallied off the lows. In fact, I would watch for a breakdown through the $220 level which is key support going back a couple years. AAPL shares a very similar look with its $125 level.
You can see something similar with GOOGL, where a modest rally in the stock has brought price right back to important downtrend resistance and the 50-day moving average. MSFT, AAPL, and GOOGL also have the MACD resetting below the zero line.
In a stock market that’s seeing such strong breadth and the average stock outperforming, the attempt at a rebound among these behemoths has been abysmal.
Here’s what that means and if you should be worried.
I love when I see an article declaring a “stock picker’s market”…isn’t it always!
But if there’s ever a time when you should be concerned about holding a portfolio comprised of passive index ETFs, it’s now. Here’s a scenario I can see unfolding.
You could see renewed pressure on the main indexes like the S&P 500 and Nasdaq Composite if mega-cap names start to roll over and take out support levels noted above. That’s because of their sheer weight in the indexes. AAPL, MSFT, and GOOGL alone make up nearly 15% of the S&P 500, and 31% of the Nasdaq 100.
But at the same time, an expanding number of high quality breakouts means the average stock is holding up just fine…now that’s what I call a stock picker’s environment.
I also want to highlight that we’re back to an interesting spot with the S&P 500 testing the 200-day moving average yet again. Here’ my recent post and chart:
If the average stock does continue to demonstrate relative strength, there are several setups primed to breakout that I covered recently in Mosaic Chart Alerts. LSCC is trading just below resistance, where I’m watching for a move over the $74 - $75 area.
I also recently issued a special report where I share the fundamental and chart setup for WTTR in more detail, and the similarities it has with CRK’s breakout from last year. You can read that report here in case you missed it.
That’s all for this week! Keep an eye on how the average stock is holding up relative to the broader market, especially if weakness emerges in the mega-cap stocks. Also be aware that the pace of 4Q earnings reports will start to pick-up. I’ll be watching how 2023 profit estimates evolve, and will have more on that in a subsequent report.
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Disclaimer: these are not recommendations and just my thoughts and opinions…do your own due diligence! I may hold a position in the securities mentioned in this newsletter.