2023-09-06 14:05:32 ET
Summary
- The hottest stocks in the Nasdaq show different technical patterns. Part of that is based on how they got to this point.
- I break down the top stocks, separate those which are stagnating from those which have a decent reward/risk profile.
- MSFT looks the best of the group, and that may be a signal that the market is shifting in what it is going to reward in the months ahead.
The 7 stocks that have carried the headline stock market indexes this year do not appear the same when it comes to assessing their price risk. That is, their chart patterns look quite different. In fact, below I will show that some of these mega-cap stocks still look decent as we enter September, others look awful, and some are in between.
Perhaps more significantly, my chart review of these stocks and many others paints a picture of a market that is likely to favor a certain type of stock going forward. Specifically, companies that are cash juggernauts, pay a dividend (even if it's not a high yield these days), and are growing that dividend, are in a better position technically speaking than the other giant stocks.
The market is trying to tell us a story… we just need to listen!
That's what my approach to charting is all about. I'm short on jargon and long on "bottom line." And the bottom line is never a 100% proposition. I think investors who try to make it that black and white eventually get punished. I look at EVERYTHING as a tradeoff: anything can go up in price at any time. It is just a matter of how much risk of a major loss is attached. That's what I went searching for within QQQ/QQQM.
When reviewing charts of the stocks that make up the Nasdaq 100 Index, I assumed I'd see similar patterns across the "Magnificent 7," the nickname given to the 7 biggest index components that currently make up an astonishing… and ridiculous… 45% of Invesco QQQ Trust (QQQ) and its clone, Invesco NASDAQ 100 ETF ( QQQM ). If you're wondering why the same issuer has 2 essentially identical ETFs, it has to do with Invesco introducing a slightly lower cost (15 basis points expense ratio for QQQM versus 20 basis points for QQQ) to gather more assets, but knowing that institutions will continue to prefer the latter ETF due its massive amount of liquidity.
Before whipping through the charts and drawing some tighter conclusions, here are a few background data points from Seeking Alpha's quant ratings that are a good scene-setter. After all, while I've been a chartist since 1980 when my late father taught his then-teenage son this wonderful science/art form using graph paper and a pencil, technical buy/sell decisions are the last part of my investment process. While they are the most important to me, they can only be made in the context of macro and fundamental analysis, and the conclusions I draw about broader market risk and reward.
When it comes to these 7 stocks, the returns have obviously been there. However, note that Apple Inc ( AAPL ) and Microsoft Corp ( MSFT ) have been noticeable underperformers in 2023. For them, it is like a guy that would have hit 20 home runs for the 1961 Yankees. You had a nice season, but there were six players on your own team that hit more that year.
Now, there's one very telling time frame not listed above: 2 Year Returns. So here they are:
YCharts and Seeking Alpha
Do you see what I see? A very mixed bag, so to speak. That's because 2022 was a wreck for the Nasdaq (down 33%), so 2023 has been a bounce-back year, not some huge new bull market. Except for Nvidia ( NVDA ), which has separated itself from the rest by a mile.
These stocks were not cheap before 2022, and they are the opposite of cheap today. This part of the stock market is in a valuation mess, as shown in the Quant Factor Grades below. Furthermore, AAPL and MSFT rate below average in growth. Ironically, that may work in their favor, as we'll see below.
To the charts!
Here's my summary of how these 7 look, using the color-coded scoring system I developed during my years as an investment advisor and mutual fund manager (now retired from both). As you can see, none of the stocks rated high or low. That is the state of today's uncertain equity market. There is a lot of "ugliness" underneath these leaders (i.e., the other 493 of the S&P 500) but they are still hanging in. MSFT gets a positive rating, meaning that it has a good shot at additional gains without a very high amount of risk.
Apple and Google rate neutral, which means they don't yet show more obvious risk indications in the chart as the other 4. But even those (AMZN, TSLA, NVDA, META) get negative ratings, and as the comments know, this is more like "leans bearish" than "look out below," at least right now.
Here are the charts I analyzed to produce the summary above.
Rob Isbitts (Sungarden Investment Publishing) Rob Isbitts (Sungarden Investment Publishing) Rob Isbitts (Sungarden Investment Publishing) Rob Isbitts (Sungarden Investment Publishing) Rob Isbitts (Sungarden Investment Publishing) Rob Isbitts (Sungarden Investment Publishing) Rob Isbitts (Sungarden Investment Publishing)
This is my approach and I live by it. However, technical analysis is part science, part art, part eye of the beholder. I also tend to be a very risk-management focused investor. So that makes me a very tough grader!
One other note, which I alluded to earlier. Some smaller stocks in the Nasdaq 100, but those that are iconic in their own way to investors, look about as strong as MSFT, and I award them a positive rating as well. Specifically, I'm talking about Intel (INTC) and Cisco ( CSCO ). Like MSFT, they pay a dividend (for what it's worth, NVDA pays a dividend, but it is so small it's essentially a no-yield stock). The other thing about INTC, CSCO, and MSFT is that they are all members of the 30-stock Dow Jones Industrial Average. I've noted many times this year that the Dow and Nasdaq have been like strangers, exhibiting a much lower correlation to each other than in the past. Perhaps part of that story the market is telling us is that we are transitioning from an era in which super-charged growth stocks were the leaders, to one in which those growth expectations will be much harder to deliver on. That could open the door to a flight toward Nasdaq 100 companies that don't offer breakneck earnings and revenue growth, look comparatively inexpensive, have lagged the very top winners, and tend to be less exciting but very established legacy businesses. A relative tortoise versus hare scenario. We should know sooner rather than later.
Predicting the future? No. Evaluating reward and risk? Yes!
At all times, my guiding light is to recognize that while anything can go up in value at any time, the key to investing is avoiding major losses along the way. That's where my risk-management focused approach to technical analysis has served me well over the decades, and why I am introducing the Seeking Alpha community to it.
For further details see:
QQQ And QQQM: Best And Worst Of The Magnificent 7 (Technical Analysis)