Tuesday , December 10 2019
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SPX 3000 round number-itis

Summary:
Mid-week market update: At week ago, I identified two technical triangle formations to watch (see Why small caps are lagging (and what it means)). Since then, both the SPX and NDX have struggled at key resistance levels despite a generally positive news background of earnings beats, and now they have moved sideways through a rising trend line. The obvious short-term downside target are the gaps to be filled below (shown in grey).  The market seems to be afflicted with a case of SPX round number-itis, where the index advance stalls when it reaches a round number.  Weakening NASDAQ Notwithstanding the all-time high exhibited by AAPL, most of the weakness is attributable to the lagging performance exhibited by the high octane go-go stocks, such as internet, social media, and IPOs.

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Mid-week market update: At week ago, I identified two technical triangle formations to watch (see Why small caps are lagging (and what it means)). Since then, both the SPX and NDX have struggled at key resistance levels despite a generally positive news background of earnings beats, and now they have moved sideways through a rising trend line. The obvious short-term downside target are the gaps to be filled below (shown in grey).
 

SPX 3000 round number-itis

The market seems to be afflicted with a case of SPX round number-itis, where the index advance stalls when it reaches a round number.
 

Weakening NASDAQ

Notwithstanding the all-time high exhibited by AAPL, most of the weakness is attributable to the lagging performance exhibited by the high octane go-go stocks, such as internet, social media, and IPOs.
 

SPX 3000 round number-itis

I have been monitoring the top five sectors, which comprise nearly 70% of index weight, for clues to market direction. An analysis of the top five sectors reveals lagging performance by FAANG dominated sectors, namely technology, communication services (GOOGL, NFLX), and consumer discretionary (AMZN). It is difficult to see how the index could make much bullish headway without the bullish participation of a majority of the top five sectors.
 

SPX 3000 round number-itis

The analysis of the relative performance of the equal weighted top five sectors tells a similar story as the capitalization weighted analysis. As a reminder, equal weighting the stocks in each sector reduces the effect of the large cap FAANG heavyweights. All sectors show the same pattern of relative performance, except for consumer discretionary stocks (bottom panel), which is outperforming were it not for the drag provided by AMZN.
 

SPX 3000 round number-itis

The relative performance of defensive sectors also tells a similar story. Even as the market consolidated sideways, defensive sectors were creeping up in relative performance, indicating the bears were trying to take control of the tape.
 

SPX 3000 round number-itis

Still, I find it difficult to be overly bearish on stock prices. The fundamental news backdrop from Q3 Earnings Season has generally been positive, and both earnings and sales beats are coming in at above historical norms. My inner trader remains tactically short, but he is prepared to cover most of his positions and possibly reverse long should the market retreat to fill the gaps below.

The bear is only at the door, peering inside. He is not rampaging inside the house. Downside risk should be fairly limited.
 

SPX 3000 round number-itis

Stay tuned.

Disclosure: Long SPXU

About Cam Hui
Cam Hui
Cam Hui has been professionally involved in the financial markets since 1985 in a variety of roles, both as an equity portfolio manager and as a sell-side analyst. He graduated with a degree in Computer Science from the University of British Columbia in 1980 and obtained his CFA Charter in 1989. He is left & right brained modeler of quantitative investment systems. Blogs at Humble Student of the Markets.

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