When it comes to the stock market this year, we have seen prices move higher – to the surprise of many. When you look beyond the headlines however to what is actually leading these indices higher, the truth is different to what it seems. Join us this week as we dive into the markets over the first few months of 2023:
The First Quarter
There has been a lot of talk throughout the first quarter of just how strong the market has been, the Nasdaq being a particular stand out. Host Andrew Baxter points out however that 85% of the Nasdaq’s rally has been achieved by 8 individual stocks within the Nasdaq index. The large cap tech stocks within the Nasdaq have been very strong and by virtue of their size and how much of the Nasdaq they constitute, they raise the index as a whole. The same is true with regard to the S&P 500 with these big names gaining strongly and leading the market higher. Even the ratio to gainers and losers is weak, showing that many stocks in the major indices have actually struggled while it is the rally of the minority that has taken the market higher throughout the first 3 months of the year.
How to Approach Low Breadth
In situations where there are only a handful of stocks performing well, there are a few things you can do to protect yourself from backing the wrong horse. Host Andrew Baxter highlights that trading indexes and ETFs instead of individual stocks protects you from the variation between different stocks, even if they are similar companies. The tech sector has been strong but in a softening economy, tech can be weak so perhaps it is time to consider what the next play is given the recent rallies have been mostly caused by big tech stocks rallying hard. If we think about where the economy might be headed, we have seen tech companies layoff a lot of their staff to cut costs with a weaker economy and perhaps you may look to pivot because once those larger companies are no longer performing so well, we may see a downturn in the overall index.
What Happens in a Sell Off?
It is hard to know if the same phenomenon could be seen on the way down as on the way up. Could we see a move lower for the tech sector be caused by only a handful of stocks? Host Andrew Baxter explains that given the ability of the big names to pull the market higher, by the same token it must be able to majorly impact the index to the downside as well. By sheer size and weighting in the index, the moves of the few massive companies on the US market are magnified whether they are up, down or flat and the overall market often reflects what happens to those stocks.
Some Potential Plays
As always, it is important to try to read past the headlines and try to look forward as to what may be to come. When you are looking to get a feel for the overall market before trying to figure out where it might be headed, it’s important to look at the big picture and over a reasonable time frame. In this instance if you notice that the overall move higher in the market is largely due to just a handful of stocks, you might second guess as to whether it is a genuine market recovery or if you may just be seeing a temporary move higher in the market. Host Andrew Baxter suggests if you were trading on this view you could look to something like SQQQ which is a geared ETF which moves inversely to the Nasdaq, however this is certainly not an instrument to be taken lightly as it is leveraged.