Mid-week market update: One of the key indicators I have been monitoring for the health of the market is the NASDAQ 100 (NDX), which is a proxy for large-cap technology stocks. So far, the NDX has been testing an important rising relative uptrend.
If the relative uptrend were to decisively break down, it would spell trouble for the overall market.
Large-cap tech dominance
The analysis of the top five sectors in the S&P 500 tells us about the importance of large-cap growth stocks. The top five sectors comprise roughly 70% of the weight of the index, and the relative strength behavior of these sectors are important signals of market direction. The FANG+ names (technology, communication services, and Amazon) make up nearly 44% of index weight. As the chart below shows, the market leaders are the technology and consumer discretionary sectors. The relative performances of the remainder are either flat or down.
Big Tech’s fundamental headwinds
As we progress through Q3 earnings season, Big Tech stocks are starting to encounter headwinds. Netflix disappointed the market by missing revenue expectations last night, and the Justice Department launched an antitrust action against Google. As well, the strategists at JPMorgan identified a negative divergence between technology stock performance and estimate revision. While the sector has roared ahead in relative returns, estimate revisions in this sector have turned negative.
Not oversold yet
From a technical perspective, Macro Charts observed that the NASDAQ 100 recycled off an overbought condition in early September. Readings are neutral, but momentum is negative. While the NDX doesn’t necessarily collapse under these conditions, at a minimum, they will trade sideways in a choppy manner.
In conclusion, the NASDAQ 100 remains in a relative uptrend compared to the S&P 500, but investors need to keep an eye on this index. The NDX is the tail that’s wagging the S&P 500 dog. As we progress through Q3 earnings season, it remains to be seen whether JPMorgan’s warning about lagging technology earnings estimates proves to be a bearish trigger.