[Table Of The Week] A Look At The New Leadership

May 7, 2020

From the desk of Steve Strazza @Sstrazza

There has been a lot of talk about the potential implications on the broader market if Mega-Cap Growth and Technology stocks were to lose their leadership. Since they have been responsible for driving much of the gains in the major averages for years now... we can only ask ourselves, who might pick up the slack if and when this happens?

In this post, we're going to analyze the top-performing areas today and compare them to their strength before the market crashed in February and March.

We'll also look at the leaders from back then and see how they're holding up today.

This will give us an idea of whether we really are undergoing a change in leadership or not, and if so, where the new areas of strength are.

So, are the same stocks that were leading coming into the selloff leading today? Or have new leaders emerged?

If you look at the table below, mostly the latter appears true.

Click table to enlarge view.

Click here to download the full version of this table in excel.

First, we arrived at these statistics by running performance and momentum data on every individual component in the Large-Cap Russell 1000 Index (IWB). Then we grouped the components and their data by Industry and averaged each metric to come up with the Industry averages in the table above.

We then sorted the Industry Groups by their performance since the market peaked in February and included only those that have suffered drawdowns of less than 10%. Of over 100 Industry Groups, only these 13 made the cut.

The table compares the current average momentum reading of the top-performing Industry Groups to their average momentum reading when stocks were still at highs just before the selloff.

What is absolutely shocking is that 10 of these 13 groups have a HIGHER momentum reading today than they did when the market was at all-time highs in February.

To put this in perspective, none of the industry averages have hit an overbought reading and less than 5% of them have a positive return since February's peak. In other words, a hell of a lot more stocks were trading at highs and with overbought readings back in February than they are today. But that's simply not reflected when looking at today's group of leaders.

Internet Retail (IBUY), Precious Metals (GDX), Food and Pharma (XPH) all have a current average RSI reading in the ballpark of 10 points higher than it was at the market highs almost three months ago.

Of course, there are areas such as Managed Health Care (IHF), Software (IGV) and Medical Devices (IHI) which have maintained their leadership over this period... in fact, these have been some of the strongest groups in the market for several years so this is no surprise.

What's just as interesting though, isn't what today's leaders were doing in February, but what the former leaders are doing today.

These 23 Industry Groups were the strongest areas, each with an average momentum reading above 60 as of February 19th.

The data should more or less speak for itself. The average drawdown from February's peak for these Industry Groups is -21%. Their average RSI reading today is 52, down from almost 65 in February.

The underperformance from these former leaders is quite remarkable when compared with the S&P 500 (SPY) or Russell 1000 Indexes which are currently only about -15% off highs with momentum readings just beneath 60.

The fact that we are gradually undergoing a change in leadership is undeniable. While some areas are likely to defy this theme and continue to outperform (Managed Health Care, Software, etc), and structural trends like Growth over Value and Large over Small are still in place, it's important to be aware whenever there is a change in the character of the market like this.

Reversals in some of these long-term relative trends are now much more of a possibility, and might soon become a probability if the market continues to undergo such significant rotation in leadership.

Only time will tell whether this ends up being a positive for the broader market or not. While an expansion in participation is always welcomed, it may not be the best thing if it comes at the expense of the mega-cap names that drive the major indexes. And just to be clear, we haven't seen it yet but it's something we're watching very closely.

Think of it this way. The best players score most of the points on any team, and the major stock market averages are no different. But it's the teams that have a solid bench and role players adding value to complement their superstars that actually win titles.

Now that the bench is finally participating, do the stars have enough fuel left in the tank to lead markets to a championship... or new all-time highs for that matter?

Let me know if you think they do or not. We love hearing from you.

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Thanks for reading and please let us know if you have any questions!

Allstarcharts Team