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A businesswoman analyzes the financial market to determine potential risks and earnings.
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Major investors, particularly institutional investors, adore these big NASDAQ names for three reasons: earnings always seem to be strong, the stocks can’t seem to go anywhere but up, and the CEOs have their hearts set on them. Each of these elements reinforces the others, resulting in ever-increasing all-time highs. Sticking to Apple, Amazon, and Microsoft makes it easy to persuade investment committees. You don’t have to spend a lot of time explaining things as the portfolio manager. You are entitled to that large year-end bonus as long as the paradigm remains unchanged and nothing changes.
The difficulty with the large tech equities making new highs right now is that other critical sectors are failing to do so. Financials, industrials, and materials would have to keep up for a rally to continue at full intensity. If they aren’t, the market as a whole is experiencing a negative divergence.
Let me demonstrate what I mean.
The daily price chart for Apple looks like this:

Stockcharts.com, Apple daily price chart, 7 13 21.
MORE FOR YOU Under Tim Cook’s leadership, Steve Jobs’ amazing, original invention just keeps cooking. You could have bought it at the low point in March 2020, when the price-to-earnings ratio was below 20. With a price-to-earnings ratio of around 33, it’s no longer considered a value company.
The following is an example of an Amazon daily price chart:

Stockcharts.com, Amazon daily price chart, 7 13 21.
The Jeff Bezos business model is performing admirably, with new all-time highs appearing virtually monthly. This is another one that might have classified as a bargain at the 2020 pandemic lows, if only for a time. However, that is no longer the case, as Amazon’s price-earnings ratio has climbed to above 70, far higher than the S&P 500’s 46.
The daily price chart for Microsoft looks like this:

7 13 21. stockcharts.com Microsoft daily price chart
What a fantastic run, huh? From a low of 215 in January 2021 to its present level of 280. For six months, it’s not awful. Microsoft’s price-earnings ratio is 38, which is lower than the market as a whole but high when compared to stock multiples in other sectors of the stock market. Bill and Melinda may be divorcing, but they are likely to be able to afford divorce attorneys.
If you compare the charts for just a minute, you can see the negative “new highs” difference between these highly traded, extensively followed NASDAQ companies and the following sectors.
First, here’s the daily price chart of the Industrials Select Sector SPDR, an exchange traded fund that better represents this sector than the Dow Jones Industrial Average, which is more narrowly focused:

7 13 21. stockcharts.com, Industrials Select Sector SPDR Fund daily price chart
There have been no higher highs since May. This is a flaw in comparison to the NASDAQ names.
The daily price chart for the Financials Select Sector SPDR looks like this:

7 13 21. stockcharts.com Financials Select Sector SPDR daily price chart
Examine the lack of a higher high and compare it to the charts for Apple, Amazon, and Microsoft.
The Materials Select Sector Index daily price chart is as follows:

7 13 21. stockcharts.com Materials Select Sector index daily price chart
So you have the media blaring about all-time highs for the NASDAQ-100 and the S&P 500, while critical sectors that aren’t getting there are mostly ignored. For those investors who aren’t paying attention, this is a recipe for disappointment.
The bull market that began in March 2020 may not be over, but signs of fatigue, if not outright exhaustion, are beginning to emerge.
This isn’t financial advice. Before making any decisions, conduct your own research and consult with a qualified investment advisor./nRead More

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