Why These 10 Stocks Matter

JC Parets
January 24, 2019

From the desk of Tom Bruni @BruniCharting

Tuesday I posted a mystery chart and asked you all to let me know what you would do. Buy, sell, or do nothing. Most of you said you'd be short or doing nothing until the range resolves lower, while only one or two of you said you'd be long with a tight stop or were waiting for an upside break.

Given how closely this chart resembles the S&P 500 or other major US Indexes, I wasn't surprised by those responses. It still feels like many people have a short bias, so continued churn at current levels or a slow grind higher could leave a lot of people left behind.

Anyway, here's the actual chart and why I feel it's relevant.

The chart I originally shared was a daily line chart of the Equally-Weighted 10 Largest Stocks in the S&P 500 (told you not to guess).

The correct chart is below, showing prices below a now flat 200-day moving average and momentum in a bearish range. After making new highs late in the third quarter, prices quickly reversed and fell below the uptrend line from the November 2012 lows, eventually making new 52-week lows. Prices have since retraced part of that decline and are settling back into a range.

Click on chart to enlarge view.

So why do these ten stocks matter? In India the ten largest Nifty 500 stocks account for nearly 40% of the index's weighting. If you get the trend in those names wrong, you get the whole market wrong.

In the US, it's half that at 21%, still a very significant number.

Generally this equally-weighted index moves in lockstep with the S&P 500, but when they don't that should get our attention.

In 2015-2016, prices of the two diverged and each corrected in their own way, however they made new highs at the exact same time. In 2018 the equally-weighted index made new highs weeks before the S&P 500, but both confirmed failed breakouts below their Q1 highs at the same time.

These stocks are a balloon tied to the market...so it's worth knowing if they're a helium balloon pulling it higher, or a lead one weighing on it.

We can't trade on this info alone, but when they're out of lockstep that's a signal to us that we should dig deeper into the internals because any breakdown in this correlation doesn't hold up over the long-term.

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Allstarcharts Team

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