by Jason Bodner

July 30, 2024

I’ve just returned from another mini-vacation, this time in the mountains of Colorado – watching some of the snow fall in avalanches, much like the technology stocks have fallen over the last two weeks.

Believe it or not, vacationing is one of the 40 most stressful life events. The good news is that it’s not among the 10 or 20 most stressful events in life. According to Dartmouth, the top five are:

  1. Death of a Spouse
  2. Divorce
  3. Marital Separation
  4. Jail
  5. Death of a Close Family Member

The top three are marriage-related, and there is also a common theme in the top 30 to 35 among 40 top stressors listed below. The common thread is a sudden or dramatic change in your life situation.

Dartmouth Life Index Table

Evolution says that we were built to adapt, but we modern humans really dislike change. We seek comfort and stability. Sudden change often overwhelms us; we go haywire. We get analysis paralysis, feel uncomfortable and usually make emotional decisions… often the wrong ones.

This is especially true for investors. Right now, the stock market is experiencing massive change. The surface doesn’t always show it because of how most of the indexes are constructed.

For instance, I see a series of problems when we rely on following the leading indexes alone:

  • One problem is that the media usually quotes the Dow Jones Industrial Average This list of 30 leading stocks was the only major index 100 years ago. It is now sort of a dinosaur. As a former broker/trader, I can tell you that no one in the financial industry regularly quotes or relies heavily on the Dow. In the investing world, most pros look at the S&P 500.
  • This leads us to our second problem, which is probably the biggest culprit with most indexes. The S&P 500 is weighted by capitalization (market size) of each of the 500 stocks in the index, so larger companies get bigger weights. Those weightings can get out of whack, so that a very few stocks dictate everyone’s perceptions of the entire market

You’re no stranger to this if you’ve heard of the Magnificent 7. If you haven’t, congratulations, you’re one of the very few. These are 7 stocks that have captivated attention for a long time now:

Stock Table 2

These seven stocks’ market caps (share price times number of shares outstanding) taken together are worth over $15 trillion. The entire S&P 500 is worth $46.6 trillion. In other words, just 1.4% of the index constituents (seven of 500 stocks) account for over 32% of a 500-stock index.

That’s a problem. It’s especially a problem now, because of the rotation we have been discussing for weeks now. It reared its ugly face in full force this week with large-cap stocks getting slammed. The NASDAQ is down about -2.5% for the week as I write this:

Index Table

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

This leads us to a third problem; the everyday investor is heavily focused on these large-cap stocks, so much so that they often ignore small-cap companies. Look again at the table above; notice the Russell 2000, it is up 11.5% since the beginning of July, while the large-cap technology-heavy NASDAQ is down -3.3% That’s nearly a 15% spread on two very divergent indexes.

This massive dispersion is causing a lot of heartburn. I’m certain that many of you know this all too well. Personally, I am long large-cap technology stocks, so I have seen my account value melt over the last two weeks too. I remind myself that this is part of the investing game: Portfolios ebb and flow. Like many, I have enjoyed a big run in my large-cap technology stocks while small-caps sagged.

That changed in mid-July. Let me show you why we are not alone in our recent pain in those stocks. If we look at where the money flows have been going, we see different pictures.

Here we can see a swift drop in the SPY (S&P 500 tracking ETF) since it peaked July 16th:

Big Money Buys-Sells

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

That’s an uncomfortable 4.7% drop. For perspective, that’s more than $2 trillion of value disappearing. Now, looking at the QQQ (NASDAQ tracking ETF), the drop looks even worse.

Since the July 10th peak, it fell a stomach churning -8.8% (a $2.3 trillion loss):

Big Money Buys-Sells A

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Here is how the Mag-7 performed since the NASDAQ peak on July 10:

Stock Table 1

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Voila! 75% of the NASDAQ wipe-out came from just those 7 stocks: It’s an index in miniature!

There’s good news for small-caps, though. When we look through that lens we see huge juice:

Big Money Buys-Sells B

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Let’s look at that unusual buying and selling broken down by market cap:

Big Money Sell Market Cap

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

You can quite literally see the money flows into small-caps and mid-caps!

Now, let’s see the ETF activity against the IWM (Russell 2000 tracking ETF):

Big Money ETF Buy-Sell

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Huge ETF buying occurred right through July 16th. A shocking 87 ETFs were bought unusually on July 16th, the most since December. Of those, many were growth ETFs like the popular ARK ETFs, small-cap, mid-cap, and value ETFs, too.

When we look at the most frequently bought stocks for the last six months, it’s stunning: 64% of the top 50 most frequently occurring stocks were large-cap (defined as $10 billion and above). Those 32 stocks accounted for 99% of the market cap of the list of 50, and 95% of the list were technology stocks by market cap:

Sector Weight PIE

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Again, by market cap, 75% of these top 50 stocks, topped by four of the MAG-7 (MSFT, NVDA, GOOGL, and META), were technology stocks. Put another way, the smallest 28 stocks (below $10 billion in market value) accounted for only $128 billion of value, only a fraction of one Mag-7 stock value.

For months, money flows continued to be huge into large-cap technology. Now, the money flows are mostly into small-caps. This catch-up trade means there is room for new leadership to emerge.

The rotation is impacting sector leadership, too: Technology and discretionary dropped while financials and real estate rose in the list. Look how sectors are rotating, with the red and green arrows:

S Tables

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

You can see the rotation in action at a sector level too, looking at unusual buying and selling:

Financials vs XLF 1

Materials vs XLB 1

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The trade now is to hunt for new leadership in small-caps. Look for companies with growing sales and earnings and expanding profit margins.

As the late physicist Stephen Hawking said, “Intelligence is the ability to adapt to change.”

Navellier & Associates owns Nvidia Corp (NVDA), Apple Computer (AAPL), Microsoft (MSFT), Amazon (AMZN), and a few accounts own Meta Platforms (META), Alphabet Inc. (GOOG) and Tesla (TSLA), per client request in managed accounts. Jason Bodner owns Nvidia Corp (NVDA), Meta Platforms (META), Alphabet Inc. (GOOG) and Tesla (TSLA), personally but does not own Apple Computer (AAPL), Microsoft (MSFT), or Amazon (AMZN), personally.

All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
The Case for Cutting U.S. Interest Rates This Week

Income Mail by Bryan Perry
A Bottom in Commercial Office Property Values Now Looks Further Out

Growth Mail by Gary Alexander
The American “Income Gap” is Much Smaller Than Advertised

Global Mail by Ivan Martchev
The Yen Strikes Back

Sector Spotlight by Jason Bodner
Managing Change in Markets Can Be Stressful – But Profitable

View Full Archive
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About The Author

Jason Bodner
MARKETMAIL EDITOR FOR SECTOR SPOTLIGHT

Jason Bodner writes Sector Spotlight in the weekly Marketmail publication and has authored several white papers for the company. He is also Co-Founder of Macro Analytics for Professionals which produces proprietary equity accumulation/distribution research for its clients. Previously, Mr. Bodner served as Director of European Equity Derivatives for Cantor Fitzgerald Europe in London, then moved to the role of Head of Equity Derivatives North America for the same company in New York. He also served as S.V.P. Equity Derivatives for Jefferies, LLC. He received a B.S. in business administration in 1996, with honors, from Skidmore College as a member of the Periclean Honors Society. All content of “Sector Spotlight” represents the opinion of Jason Bodner

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