Sometimes it can be dangerous to pictorialize the market. Stocks are more than a mere collection of information. The market has an ever-changing personality, and risk lies in its many unpredictable moods.
Still, pictures can be an important part of making of a plan. They’re an ideal means of getting a feel for things rather than gaining a mere understanding for past and projected numbers. They’re also a fast way of doing so, allowing investors to process a lot of data in short order. That’s why took a look at three market-related charts a month ago — it was a simple way to glean a lot of important information in a small amount of time.
There’s a small universe of other data we can chart to gain a better understating of the market’s state, however. Here’s a look at two more and an update of one of July’s charts, the S&P 500‘s earnings trend. Now halfway through the second quarter earnings season, the corporate profit outlook has taken a solid turn for the better.
Trade sizes never really recovered, now they’re shrinking
For multiple reasons (not the least of which is the lack of sports on television), the big rebound since March’s low appears to have pulled in a lot of new and smaller investors into the market. The implication is simple — while inexperienced newcomers have seemingly done well for themselves so far, they’ve yet to face some of the tougher realities of the stock market. Once real bearish turbulence manifests, this crowd is likely to panic, accelerating any wave of selling that’s already taken shape.
Some will dispute the notion that too many amateurs have crowded a market that’s suspiciously missing much of the “big money” it needs to keep moving forward. There’s more than ample evidence, however, that small-time traders are indeed doing most of the heavy lifting right now.
The chart below plots some detailed data of the NASDAQ exchange’s daily action. More than just the typical volume and price movement of the composite, our image plots the NASDAQ’s average-sized trade by share count, and the average dollar amount committed per trade. The composite itself is now well above its February peak, but the average trade size (by share volume and by dollars) remains suspiciously weak compared to pre-coronavirus levels.
And that’s saying something. Bear in mind that stocks started the year off on a bullish foot, continuing a bullish end to 2019. Between October’s low and February’s peak, trade sizes became and remained big despite the scope of the gain. But those larger, institutional-level players aren’t back to the table, so to speak. This advance is being driven by the proverbial little guys, and even they’ve started to back off in recent days even though the NASDAQ has continued to drift upward.
Big sector performance divergence, rotation looms
The market may be on a roll, but not every piece of the market is participating in the move. In fact, most groups aren’t. Aside from the technology sector, as reflected by the Technology Select Sector SPDR (NYSEMKT:XLK), most sectors have merely kept pace with the S&P 500’s 12-month performance. Energy stocks have severely underperformed for that timeframe, with the Energy Select Sector SPDR (NYSEMKT:XLE) still down 35% for the timeframe.
The market’s leaders and laggards change somewhat when just looking at the rally since March. Energy stocks soared out of that rut better than any other. They’ve since lost that lead though, overtaken by industrials, discretionary, and once again, tech stocks. The iShares Transportation Average ETF (NYSEMKT:IYT) has accelerated since last month, too. Even so, the past few months are the outliers, with many sectors only unwinding steep losses suffered during the February/March sell-off.
To that end, it may be time to start looking for some leadership rotation, where laggards accelerate and leaders lag. That’s a potential problem for the overall market, as big technology stocks tend to set the tone. They look vulnerable right now.
Earnings to rebound sooner, better than expected
Finally, although we looked at the S&P 500’s past and projected earnings a month ago, that particular chart is worth an update simply because the outlook is already dramatically different. The second quarter’s bottom line isn’t nearly as ugly as initially expected, and the earnings recovery into next year looks stronger and faster than initially forecast.
A month ago, S&P was modeling second-quarter per-share profits of only $22.37 for the S&P 500, with a slow and shallow recovery taking shape through the fourth quarter. With most of the S&P 500’s constituents having reported their second-quarter results, S&P now believes the index’s per-share profit figure for Q2 will be closer to $23.77, with a quicker earnings rebound on the horizon.
This is clearly good news, however, the big concern from last month is still on the table. Regardless of the actual damage done by coronavirus lockdowns, the broad market remains uncomfortably overpriced. As of this week, the S&P 500 is priced at a trailing P/E of 27.6, and a forward-looking PE of 23.4.
Don’t jump to any immutable conclusions based solely on these charts. The underlying data changes every day (albeit marginally), and the market is more than just numbers. Stocks ultimately trade based on where investors believe companies will be, not where they are or where they’ve been.
All the same, these images should make you think about what’s really happening, and whether or not the market is really as healthy as it seems to be.
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