We are lucky to have a Chartered Market Technician on staff here at Privada Wealth Management. In our morning market debrief, Jared shared some data with me I thought was imperative to pass on. His insight and data points will follow below, but first let me frame the data with a metaphor.
Imagine you stand on the shore and see a row boat. The boat is being swept away by strong currents and the rowers are furiously attempting to get back to the safety of the harbor. What you can't see is that there are three types of rowers. Small, mid-size and large rowers. The reason that they are having such a hard time is that all of the rowers have Coronavirus.
Luckily, the five largest rowers seem to recover first and start rowing. The small and mid-size rowers, however are still quite ill and not really helping at all. From your perch on the shore, it seems things are getting better. But what you may not realize is that these five are doing all the work and getting exhausted. There's a risk that this exhaustion could cause them to relapse into a sick state and we are back to where we started.
If it’s not already apparent, the rowers are different types of equities: Large, Mid and Small cap. The five largest rowers are five companies that are moving the indexes in the right direction. But the risk of relapse is real. I'll let Jared take it from here.
Rey's analogy explains what we're seeing on the charts. I created a custom index using six large cap stocks. Everyone should be quite familiar with these names. The index is comprised of adding together Facebook, Apple, Amazon, Netflix, Alphabet, and Microsoft together. As we can see, this custom index is basically back at all-time highs. It created one large V-shaped recovery almost as if the coronavirus sell-off never happened. Looks great in theory, but does the rest of the market look equally as good? I would say no, and I'll show you in the following charts why.
The following charts are of the micro-caps (IWC), small-caps (IWM), and mid-cap (MDY) stocks. Micro-caps peaked in August of 2018 and are still roughly 31% off its all-time high. Small-caps peaked in August of 2018 and are roughly 26% off its all-time high. And mid-caps, the strongest of the three, peaked in February of 2020, but are still about 23% off its all-time high.
Going back to Rey's analogy, the smaller rowers need to put in some extra work or we may be nearing a point of exhaustion. If you would like to discuss this further and see how it may affect your portfolio, please click here. Stay safe out there!