Is FAANG strength covering up stock market weakness?

Is FAANG strength covering up stock market weakness?

Six stocks account for 98% of the S&P 500 Index’s advance from the July low, according to Bloomberg. That’s right, 98%!

Those six stocks are (no big surprise here): Facebook FB, -1.51% Amazon AMZN, -0.36% Apple AAPL, -0.01% Netflix NFLX, -0.79% Google GOOG, -0.94% GOOGL, -0.96%  and Microsoft MSFT, -0.33% Let’s call them FAANG+M.

That raises two questions:

Is FAANG+M strength covering up market weakness? Is FAANG+M leadership bearish for stocks?

Read: Earnings surprises are bigger, thanks to growing use of non-GAAP metrics

Is FAANG+M strength covering up market weakness?

The S&P 500 SPX, -0.56%  consists of 500 components. If 98% of S&P 500 gains come from six components, the remaining 2% comes from 494 companies. That means 494 companies are essentially flat. That can’t be good, right?

To test the “market flat” theory, let’s broaden our horizon and look at the NY Composite Index, which includes some 2,000 stocks. This dilutes the influence of FAANG+M considerably.

As one would expect, the NY Composite (top graph) is lagging behind the S&P 500, and remains about 5% below its January high.

However, the lower graph, which shows the cumulative NY Composite advance/decline line, contradicts everything you’ve just read. How so?

Is FAANG+M leadership bearish for stocks?

The NYC a/d line reached a new all-time high this week, which means that more stocks are advancing than declining. That’s good news, especially longer-term.

In fact, the cumulate NY Composite a/d line suggests that a major market top is still months away. Why? A bearish divergence (where the S&P 500 makes a new high, but the NY Composite a/d line doesn’t) usually happens months before a major top.

FAANGs have outperformed the S&P 500 and Nasdaq COMP, -0.57%  for almost 10 years. It hasn’t hurt the market yet. Based on the NYC a/d line, that suggests it will stay that way for at least a little longer.

One more twist

Here is one more twist:

The top graph (in gray) represents the NY Composite advance/decline ratio. The 10-day simple moving average (SMA) of this ratio is currently at 1.13. As the graph shows, such low readings have been seen when stocks are at the bottom of their trading range, not the top.

Contrary to the cumulative NY Composite a/d line, this is a negative.

Summary

What’s the purpose of discussing conflicting indicators?

Knowledge is king. If indicators are in conflict, investors can adjust their strategy rather than blindly following a pundit who may take just one indicator out of context.

My personal interpretation of the above indicators is potential short-term weakness, but longer-term strength.

Talking about context: My latest S&P 500 update looks at a daunting resistance cluster, which raises this question: Is it now or never for stock market bears?

Simon Maierhofer is the founder of iSPYETF and publisher of the Profit Radar Report. He has appeared on CNBC and FOX News, and has been published in the Wall Street Journal, Barron’s, Forbes, Investors Business Daily and USA Today.

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