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The NASDAQ tail wagging the market dog

Summary:
Mid-week market update: One of the key indicators I have been monitoring for the health of the market is the NASDAQ 100 (NDX), which is a proxy for large-cap technology stocks. So far, the NDX has been testing an important rising relative uptrend.  If the relative uptrend were to decisively break down, it would spell trouble for the overall market.  Large-cap tech dominance The analysis of the top five sectors in the S&P 500 tells us about the importance of large-cap growth stocks. The top five sectors comprise roughly 70% of the weight of the index, and the relative strength behavior of these sectors are important signals of market direction. The FANG+ names (technology, communication services, and Amazon) make up nearly 44% of index weight. As the chart below shows, the market

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Mid-week market update: One of the key indicators I have been monitoring for the health of the market is the NASDAQ 100 (NDX), which is a proxy for large-cap technology stocks. So far, the NDX has been testing an important rising relative uptrend.
 

The NASDAQ tail wagging the market dog

If the relative uptrend were to decisively break down, it would spell trouble for the overall market.
 

Large-cap tech dominance

The analysis of the top five sectors in the S&P 500 tells us about the importance of large-cap growth stocks. The top five sectors comprise roughly 70% of the weight of the index, and the relative strength behavior of these sectors are important signals of market direction. The FANG+ names (technology, communication services, and Amazon) make up nearly 44% of index weight. As the chart below shows, the market leaders are the technology and consumer discretionary sectors. The relative performances of the remainder are either flat or down.
 

The NASDAQ tail wagging the market dog

Big Tech’s fundamental headwinds

As we progress through Q3 earnings season, Big Tech stocks are starting to encounter headwinds. Netflix disappointed the market by missing revenue expectations last night, and the Justice Department launched an antitrust action against Google. As well, the strategists at JPMorgan identified a negative divergence between technology stock performance and estimate revision. While the sector has roared ahead in relative returns, estimate revisions in this sector have turned negative.
 

The NASDAQ tail wagging the market dog
In addition, analysis from Absolute Strategy shows that the growth/value trade has been in effect a duration trade. For the uninitiated, duration measures an asset’s interest rate sensitivity. The high the duration, the higher the price sensitivity. 
The NASDAQ tail wagging the market dog
The 10-year Treasury yield has risen to test the 0.80% level. Any upward movement in bond yields will ultimately put downward pressure on growth stocks.
The NASDAQ tail wagging the market dog
US large-cap tech stocks aren’t exactly cheap. If you are looking for an index of cheaper and equally dominant large-cap companies with strong competitive positions, consider the Asia 50 Index (AIA). The top three stocks in the index are Tencent Holdings, Samsung Electronics, and Taiwan Semiconductors, and they make up about 40% of the index.
 
The NASDAQ tail wagging the market dog

Not oversold yet

From a technical perspective, Macro Charts observed that the NASDAQ 100 recycled off an overbought condition in early September. Readings are neutral, but momentum is negative. While the NDX doesn’t necessarily collapse under these conditions, at a minimum, they will trade sideways in a choppy manner.
 

The NASDAQ tail wagging the market dog

In conclusion, the NASDAQ 100 remains in a relative uptrend compared to the S&P 500, but investors need to keep an eye on this index. The NDX is the tail that’s wagging the S&P 500 dog. As we progress through Q3 earnings season, it remains to be seen whether JPMorgan’s warning about lagging technology earnings estimates proves to be a bearish trigger.
 

 
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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