Overview
Small-cap stocks were hit hard this week but are nearing key support.
US 10-year yields rose about 5 basis points, stabilizing a bit.
Mega-cap growth stocks are holding up well.
The weakness in the small-cap stocks could be a warning sign for the weeks ahead.
Key Question:
As discussed last week, rates could fall further, but a broad trading range is more likely. Stable to lower interest rates could help technology stocks, which have been relatively strong for several weeks. So what can we say about potential returns for them over the next year? We analyze the QQQ using regression analysis for clues.
Performance Snapshot
The key market indexes had a losing week, with Mid and Small Cap stocks being particularly hard hit. They are not approaching key support from earlier in the year, and further weakness could pull down large-cap stocks as well.
The sensitive net bull-bear balance from leveraged and inverse ETFs tipped below zero, with a rounded reading of -13. The principal source of weakness was the small-cap and mid-cap indexes. A reading below -60 would point to a sustainable down-trend, so these values bear watching carefully.
The Vanguard capitalization-weighted ETFs show what is happening in the markets. Observe how the mega-cap and large-cap growth stocks have positive multi-period returns and moderately strong trend strength. Conversely, value ETFs and Small-cap and Mid-cap ETFs all are in the lower-left quadrant, with negative multi-period returns and weak trend strength.
The major US sectors tell a similar story. Defensive and interest-rate sensitive sectors are in the upper-right (strong trend strength), and virtually all other sectors have weak trend strength over both the short and long term. Not surprisingly, the broad weakness amongst the sectors is seen in the trend spectrum chart below.
The trend spectrum of major US sectors is quite negative over the past couple of weeks, showing the strength of recent selling. However, in the long term, the trend is firmly pointing toward higher prices.
Regression Analysis of Key ETFs
We begin by looking at the VTWO chart over the past 325 trading days since this ETF represents the Russell 2000 index of small-cap stocks. The linear regression fit is excellent, and it is also clear that the price of VTWO has been moving sideways since touching the topmost red line. VTWO has fallen below the lower green line and is pushing on the lower red line. There is good support around 84, but further weakness below 82 would turn the chart quite negative. Now contrast this chart to that of VONE, the Russell 1000 index of large stocks. VONE has also trended beautifully but is firmly near the center of the channel. Indeed, VONE prices have found support near the lower green line over the past year or so. This divergence reflects concern about future economic performance and perhaps also helps explain the decline in bond yields.
The QQQ Forecast
The QQQ chart also shows a steady uptrend since last March, with consistent support near the lower reaches of the regression bands. Relatively speaking, prices have trended more persistently on the VONE chart. Using the best-fit linear regression line from the figure above to project out a year, the most likely range of returns varies from +18% to +38% and is centered around +28% (see chart below). Naturally, the market does not have to follow this script, and as we show in the VTWO chart above, it could go sideways or decline outside the regression channel.
Strongest Stocks
Here are the strongest stocks in our database as of Friday. Of course, there are many interest-rate-sensitive stocks (such as REITs) on the list.
Wrap-up
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Disclaimer
And now for some housekeeping. This publication is for “edutainment,” education, information, and entertainment purposes only. It is not to be construed as investment advice. Past performance is not necessarily indicative of future results. Our disclaimer at chandeindicators.com is included herein by reference.