Michael Kahn, in his regular Barron's column, talked about where the various major indices stand in relation to their highs of the year along with his opinion, technically, on each of them.He made an interesting point out a recent shift in leadership to larger companies and drew what I thought was a good conclusion to pass along here.
He is focused on the S&P 100 (OEX), the biggest of the big, as the canary in the coal mine for the market. He says "If the steadiest and strongest index runs into problems, then the rest better watch out."
There is an ETF that mimics the OEX that trades under ticker OEF. I thought that to illustrate the point, using the Rydex Russell Top 50 (XLG) might capture this point a little better.
This chart compares XLG to SPY for the last six months. A similar chart comparing OEF and SPY shows a flat line which is corroborated by a 0.982 correlation, per Portfolioscience.com. XLG has a slightly lower correlation to SPY than OEF at 0.935. As read I Michael's column, a rolling over of the biggest of the big would spell trouble, this chart just looks at it a little differently.
9 comments:
You didn't have to read Barons to get the skinny on megacaps. Hey, one of your readers, me, mentioned new leadership in this cap size. But, barons has the value added--proxy for the market. Good fine on rydex 50. Besides oef, I would suggest dgt. Oef, though looks like less volatility at twice the number of holdings. Those correlations don't match real world for a six month period of time. Such high r values but your chart shows xlg as superior. fwiw, ytd, oef and dgt have 2% higher outcomes than spy. I'm hoping a position in oef will be worth holding for a while. Even a dividend of about 2%.
please correct me if I am wrong, I always thought large cap stocks were the last leg of a bull market.
that is correct, that is what I think Michael is implying, something I have written many times in the past, and consistent with my thinking on the blog for the last few months.
Forest from the trees. Thanks.
Compare 5yr returns for Russell 2000 Value and Large Caps (esp growth) for these two periods:
1995-2000
then
2000-2005
It will open eyes.
g
So...maybe the last leg..but that leg is good strong mutton. The gorrilas of the 90's may be back.
Ewl,switzerland, speaking of legs, sure is besting europe. one going thru resistance, the other hitting resistance.
Excellent find. A couple further thoughts. If you look at literally any risk sector over the past month or so, you'll see that all have under-performed the mega-caps. Short point - risk money is being taken off the table.
My thoughts here are that the markets are all forecasting that a much greater slowdown than is generally perceived is coming. Evidence?
a) the bond market is rallying so strongly,
b) the natural resources sectors are falling off so sharply,
c) emerging markets are lagging, d) gold is selling off sharply.
The large cap/tech rally is really a sucker's rally meant to pull investors into a turbulent market based on a fear of under-performing the indices.
With so many believing that a rally in the last few months of the year is a foregone conclusion, it might be time to put on the "big fade".
can't argue logic, i agree.
big fade? maybe but I hop not, at the start of the year i thought SPX would finish 2006 between 1180 and 1219. I haven't changed my mind but the chance I am wrong is higher than it was earlier this year;-)
"....sucker's rally mean't to pull investors money..."?????
So, now the market has a mind of it's own. And it's a mean mind...one that wants to punish us by "pulling" our money into it?
Pleeeeaaaaasssseeeee!!!!!!
Emerging markets are weak because most have large oil/metals/materials componant. Duh.
Oil/Gold are weak because cab drivers were betting on a sure thing with that trade.
We'll see what happens.
g
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