SPY - The Revenge Of Tech: MGK Powers Higher To Start 2023

Summary

• Mega-cap growth stocks led the market higher in January as rates fell and what failed in 2022 snapped back.
• SPY appears poised for more 2023 gains, but the bulls have work to do with the biggest of big names.
• With a Fed meeting and key earnings on tap, expect volatility.

Don’t call it a comeback.

US mega-cap growth stocks caught a monster bid to kick off the new year. Bullish price action in the Vanguard Mega-Cap Growth ETF ( MGK ) comes in advance of the triple-A day on Thursday when Apple ( AAPL ), Amazon ( AMZN ), and Alphabet (GOOG) ( GOOGL ) all report Q4 results. Microsoft ( MSFT ), Tesla ( TSLA ), and Netflix ( NFLX ) have already issued results with mixed but generally positive price action. Overall, the S&P notched its best month since 2019.

Big Earnings This Week

For the month, the S&P 500 returned 6.2% while the Nasdaq 100 ETF ( QQQ ) jumped more than 10.5%. Small caps, meanwhile, rallied 9.8% while foreign equities outperformed too, as measured by Vanguard FTSE All-World Ex-US ETF ( VEU ) which surged 8.7%. Bullish price action came after a notable December decline . It was the best January for the Nasdaq since 2001.

A January To Remember: Qs Lead SPY Higher

Across the fixed-income space, the US 10-year yield dropped from 3.87% to 3.53% as a decent CPI report and less intense wage growth in the December jobs report assuaged investors’ inflation fears and triggered hopes for a more dovish Fed in the coming months. As it stands, traders have priced in a terminal policy rate slightly under 5%, and that expectation has been consistent in recent months, helping to bring down interest rate volatility.

The Fed's Terminal Rate Seen Under 5%

As for this week’s FOMC meeting, barring something truly extraordinary, it will be a 25-basis-point hike, with all eyes on the Fed’s statement and ears on the 2:30 pm press conference on Wednesday.

A Quarter-Point Hike Is In The Cards

Across commodities, it was a great month for gold (+6%) and gold mining stocks, but oil prices wavered, finishing down about 1%. Natural gas plunged for its worst month in 22 years amid a very mild winter in both the US and across Europe. These moves came as the US dollar index gave back 1%, also helping to lift non-US stocks on a relative basis to US shares.

Gold Strong, Oil Weak, Dollar Down in January

Natural Gas: Worst 2-Month Stretch Ever

Amid the snapback in growth stocks and long-duration assets, crypto rose to start 2023. Bitcoin was above $24k for a time while Ether moved commensurately. Total crypto market cap now sits back above $1 trillion. But let’s home in on mega caps as they will be in play the rest of this week with a handful of major firms reporting fourth quarter results.

Crypto Off To A Hot Start in 2023

For background, MGK offers investors exposure to only the very biggest domestic stocks that fit in the growth style category. Vanguard uses the CRSP index as its benchmark, so what you’ll find in this index ETF is that there’s left shifting going on relative to some of the S&P-style indices. Hence, mega-cap growth is a bit purer as S&P recently moved more traditional growth into value due to the group’s poor performance in 2022 while still growing earnings.

According to Vanguard , MGK employs a passively managed, full-replication approach and features a very low expense ratio of just 0.07% annually. In terms of liquidity, the median 30-day bid/ask spread is just four basis points while average volume is solid at more than 130,000 shares. I see it as an ideal choice for playing moves in the biggest of big growth names domestically.

With 96 total positions, you won’t get much yield in MGK since its dividend rate is just 0.7% given high weightings of tech names. You also will pay up for MGK shares as Vanguard lists its P/E ratio above 26, taking a high 27% growth rate into account, and the PEG ratio is just about 1, which is actually below that of the broad market.

S&P Valuations By Sector

But here’s a better look. The so-called “Mega-Cap-8" valuation is now back to pre-pandemic levels, according to Yardeni Research . With earnings growth perhaps taking a pause this year, that seems like a fair valuation to me with maybe some downside risk in the near term.

The Mega-Cap-8 Remains Back to Pre-COVID Valuations

The Technical Take

Let’s first look at the broad market. SPY is back above its falling 200-day moving average. Clearly a bullish cue, the ETF is also on the cusp of a golden cross. Normally when such a moving average crossover takes place with stocks more than 10% below their high, more upward price action is expected, according to Ryan Detrick .

I would like to see SPY rally above its December peak to notch a higher high – that would augment a higher low put in at the end of December. What’s more, that rally would undoubtedly break the downtrend off SPY’s all-time high notched more than a year ago. Overall, a new uptrend is evident, and a buy-the-dip mentality could be a 2023 theme compared to last year’s sell-the-rip mentality.

SPY: Bearish to Bullish Reversal

As for MGK, the look is not as convincing. Notice below that MGK remains simply near – not above – its long-term moving average and a golden cross is a long way off.

Key for the fund is a hold of the $165 to $167 range. The bears would love to take mega-cap growth to new cycle lows while the bulls have their work cut out to bring MGK above an uptrend resistance line. Overall, you must acknowledge that SPY’s chart is much improved but also that MGK has something to prove.

MGK: Watching the 200-Day

I like to peek at seasonality in broad ETFs, and according to Equity Clock, MGK can experience some February volatility before often finding a low in early March. Investors should take this into consideration, but not assume it’s gospel.

MGK Seasonality: Bullish Moves Typically Begin in March

The Bottom Line

Equities enjoyed a strong beginning to 2023, but large-cap valuations are now more stretched despite their impressive trailing EPS growth. Strategists widely expect earnings forecasts to continue lower, and with the S&P 500 trading at 18 times current estimated profits, taking a bit off the table is likely a prudent move ahead of what can be a rocky February period. The technical picture is more encouraging, though, and I expect any near-term declines to be buying opportunities.

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