Big Tech stocks are about to create a setback for indices

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Mega-cap tech stocks pushed the Nasdaq and S&P 500 higher while, like a shiny veneer, they masked broader equity market weakness.
But there is reason to believe that the hedge may soon be phased out as mega-caps turn into a liability for the wider market.

Here is the 2020 performance (as of July 30) of mega-cap tech stocks versus the Nasdaq-100 NDX,
+ 1,77%,
S&P 500 SPX,
+ 0,76%,
Dow Jones Industrial Average DJIA,
+ 0,43%
and Russell 2000 RUT,
-0,98%. Facebook FB,
+ 8,17%
: + 14,25%

Amazon
AMZN,
+ 3,69%
: + 65,16%
Apple AAPL,
+ 10,46%
: + 31,03%
Microsoft MSFT,
+ 0,54%
: + 29,30%
Netflix NFLX,
+ 0,63%
: + 50,14%
Alphabet GOOGL,
-3,27%
: + 14,86%
Nasdaq-100: + 22,70%
S&P 500: -0,48%
Dow Jones Industrial Average: -7.80
Russell 2000: -10,39%
The indices least exposed to mega-cap technology performed the worst.
The chart below quantifies the dominance of mega-cap tech stocks. The black chart is an equally weighted index of Amazon, Apple, Facebook, Microsoft, Netflix, Alphabet – let’s call it the FAAMNG index. (The “G” stands for Alphabet unites Google.)

Since the start of 2009, the FAAMNG index has climbed to 4,089%, while the Nasdaq-100 has gained “only” 757%.
The leadership of mega-caps has been optimistic over the long term. The enlarged version of the same chart includes the same long-term trendline (purple) in addition to a short-term trend channel (orange). This chart includes Thursday’s post-earnings peak.

The next chart is the one that suggests that mega-cap strength has become too much of a good thing.

For better and for worse

The chart below compares the Nasdaq-100 with the 80-day rate of change (ROC, percent) of the FAAMNG index. The rate of change was 71.14% on July 10.

As the blue lines show, there is an increased risk of pullback – especially since 2018 – whenever the rate of change exceeds 45%.
The rate of change is more of a useful medium-term indicator for the months to come. Here is a more suitable graph for the weeks to come.

Short-term considerations

Earlier in July, the Nasdaq Composite Index broke through the trend channel and Fibonacci resistance, then fell below.
Now the Nasdaq Composite is testing this resistance level again (around 10700 points). If it can break and stay on top, any short-term danger will be postponed.

However, as discussed here, momentum does not die off easily, so a dip below the green support levels shown via the short term chart insert (blue box) is needed to start confirming a challenge.
Regarding this support, I stated in the Profit Radar report of July 26 that: “Aggressive investors who are concerned about missing out on any advantage may consider going long with a stop-loss below support.”
To sum up, the strength of mega-ceilings may have become too good a thing. A break above resistance is needed to carry risk forward, but a break below support is needed to confirm a deeper pullback.
Simon Maierhofer is the founder of iSPYETF and the editor of the Profit Radar Report.

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