From the desk of Steve Strazza @Sstrazza
Thanks to everyone for participating in this week’s Mystery Chart. The responses were pretty mixed with most wanting to do nothing for now and wait for a retest of the recent highs or lows before taking action.
While it’s hard not to like this uptrend over the long-term, doing nothing in the near-term is more or less the camp we’re in as well.
With that as our backdrop let’s discuss why this chart is important and on our radar right now.
This is a daily line chart of the All Star Charts Custom MAGA Index, which is an equally weighted index of the four largest stocks in the US Equity Market, measured by market capitalization.
Three of these companies are already in the trillion-dollar club as Microsoft (MSFT), Apple (AAPL) and Amazon (AMZN) all have capitalizations of roughly $1.2T to $1.3T. Google isn’t far behind with a market cap just under $900B.
The reason we look at these stocks together in a custom index like this is simple. They are absolutely massive relative to the rest of the market, even other mega-caps, and are thus responsible for driving much of the gains in the major US indexes. The next largest company, Facebook (FB), which has a market cap of roughly $500B is still worth less than half of most of these giants.
This chart isn’t just important due to the size of these stocks but also because of their continued outperformance. The index is just about 6% off its all-time highs. How many stocks and indexes can say the same? I guess Amazon can, as they are trading at fresh all-time highs this week. Meanwhile, Apple and Microsoft aren’t far behind.
With a combined market cap of about $4.6T, the MAGA stocks make up about 12.5% of the total US Equity Market which is worth roughly $37T.
We’ve written a lot about the Nasdaq’s (QQQ) pervasive outperformance vs pretty much any other major average in both the US and abroad. Well, that is because these stocks contribute a whopping 46% of the Indexes roughly $10T in total market cap. How can it not outperform when its biggest players are showing such relentless strength?
We’ve also talked a lot about the underperformance from small-cap stocks in recent years. Well, Microsoft and Apple alone are larger than the entire Russell 2000, so as long as these mega-cap names keep pushing higher it’s going to be hard for that trend to reverse any time soon.
To illustrate this trend, here is a look at the Mega-Cap (MGC) vs Small-Cap (IWM) ratio, which recently accelerated higher to nosebleed levels and registered its most overbought momentum reading of all time.
After resolving from a decade-long base and ripping to all-time highs earlier this year, prices have been consolidating in a high and tight flag for the past month. Nothing about this is bearish from any sort of intermediate or long-term perspective.
We look at a number of other mega/large-cap vs mid/small/micro-cap ratios and they all look similar. In order for these trends to reverse, we’ll need to see underperformance from the largest companies that are driving these trends, such as the MAGA stocks.
Here is a ratio chart of our ASC Custom MAGA Index relative to the Nasdaq 100 (QQQ), which has been stair-stepping to new all-time highs since 2015 now.
If you are outperforming the Nasdaq this aggressively, you are outperforming everything. This chart really demonstrates the incredible long-term strength from this group of leaders.
The point of all this is not to go out and buy these four stocks (although we do want to buy some of them, which premium members can see on our Trade Ideas page).
Instead, the strength from our MAGA Index is showing us that the leaders are continuing to lead, which is not something that is characteristic of an extended bear market environment. Unlike Technology after the dot-com bust and Financials following the sub-prime crisis, the leaders coming into Q1’s selloff remain the leaders today.
The other main takeaway is that the leaders are also the largest stocks in the market and thus are doing very much of the heavy lifting, such as driving certain averages higher despite weak breadth, making many relative trends accelerate, and more.
As our colleague at Strategas, Todd Sohn likes to put it, “there is nothing wrong with the best players scoring most of the points.” In fact, history suggests that’s what occurs the majority of the time.