What I'm buying, selling & eyeing - Part 2 (Elliott Waves and Technical Analysis)

Investment Update January 21, 2024 - It is more than the Mag-7 - much more

Options expiration day finished with the S&P 500 and the Nasdaq 100 reaching new highs. The former surpassed its previous record of 4,818 on January 3, 2022, after 511 days. The latter closed at 17,314. The YTD High was at 17,317.21. The YTD Low was recorded in the first week of January at 16,249.19.

The index is now up 6.55% YTD and 52.82% since a year ago when it reached a low of 11,329.54. The price-performance in the past 20 years is more than remarkable.

The recent bull market started in the autumn of 2022, and since then, we have completed four Elliott waves - two waves up and two waves down. Wave 5 began in late October 2023, and we have already completed another 4 waves.

We are now in wave 5 of wave 5 of the higher order wave I. While impulse waves usually have 5 waves, extended waves may have 9 legs. It remains to be seen whether we are near the completion of the initial high-order bull market wave or whether we will see an extended first high-order wave 1 with, e.g., 9 legs.

I have not seen any of the usual Elliott wave topping patterns that would firmly indicate a longer pause in the bull market run (such as an Ending Diagonal Triangle).

Seasonality would call for a prolonged consolidation that would start in mid-February/late February at the latest and last until the end of March. Too much optimism and potentially weak q4 2023 earnings may also end the bull market run at current levels (while strong earnings would probably lead to a melt-up).

The strength of the Nasdaq 100 index is in sharp contrast to the weakness of the Russel 2000 index.

We have been in a prolonged bear market since November 2021 and have completed a 5-leg impulse wave dowas potentially followed by a w-x-y correction.

In late 2023, we saw the fourth attempt of the market to break above the upper trading range boundary. So far, the attempt has failed, and it remains to be seen whether the 38.2, 50, and/or 61.8 percent retracement levels will hold and another bull market attempt will follow or whether we will retest the autumn 2023 lows and most likely move much lower (if tested).

Tech has been the strongest sector, and the S&P 500 Info Tech sector has performed even better than the Nasdaq 100. A lot of the price performance can be attributed to the outperformance of the Mag-7 stocks.

But it is not true that 493 stocks did not move at all in 2023/24, while 7 stocks accounted for nearly all of the gains. Below is the S&P 500 Equal Weight Technology Invesco ETF chart, which also recorded new ATHs on Friday, January 19. It is up close to 50 % since its low in autumn 2022.

Much the same can be said about the Nasdaq 100 Technology Index. We have seen 7 waves since the autumn low and may have to complete waves 8 and 9 before the impulse wave is finished.

We can see that the performance of the Nasdaq 100 Technology Index Fund ETF has been a bit worse than the performance of the Nasdaq 100. The ETF is an equal-weight ETF; the constituents with weightings are displayed at the bottom of the article.

The steep upward channel was already broken in early January. It is now resistance while a more modestly upward-sloping channel has formed.

While the equal-weight Nasdaq 100 Tech Index lagged the performance of the Nasdaq 100 until August 2023, this has reversed since then. We can see a broadening of the rally - a broadening of the rally in tech! Not so much a broadening in other sectors!

However, the advances within tech have been broad-based and not confined to the Mag-7. The major semiconductor indices have confirmed the highs in the Nasdaq 100 indices. The Vaneck Semi ETF (see fund details with constituents and weightings at the bottom of the article) made a new ATH on Friday, 19. This confirms that the recent tech rally has not been confined to the Mag-7.

Looking at different time intervals and applying the weighted close and the weighted alpha indicators, we can see that the WCI (orange) confirms the recent rally (each time interval) and that the WAI shows some early divergences. WAI (green) usually shows these divergences way before the market tops (2 - 3 months)

This applies to the Nasdaq 100 Technology index as well as this

The performance of the semiconductor stocks also confirms this.

While the recent tech-led bull market is much more than a Mag-7 bull market, it is striking that the small and mid-caps (especially old economy stocks) are still in a bear market. This shows two things to me.

1. The narrative of the rolling recession and rolling expansion is correct. While tech is in a secular bull market, other parts of the US economy (especially manufacturing) have not yet recovered. In my opinion, the outperformance of the tech sector will continue.

2. We are in a “the winner takes nearly everything” tech environment. We often find one leader in a particular sector or maybe two. This leader dominates the space. This is not confined to the Mag-7.

   You find this set-up with companies such as Spotify, Uber, Salesforce, Adobe, ServiceNow, Crowdstrike/Palo Alto and more. This applies to most Mag-7 - Netflix, Meta, Google, Nvidia, etc.

3. My call is to stick with these market leaders (companies that usually build a large ecosystem and not a single point of excellence solution) and to refrain from smaller companies. So far, the Crowdstrikes have outperformed the SentinelOnes; the Ubers have done way better than the Lyfts and the Nvidias are ahead of AMD, Marvel, Intel, etc. According to my definition, market leaders entail younger companies such as Mongo DB, which dominate the NoSQL database space; they are not confined to the +20-year-old market leaders such as Apple, Meta, and Google. But so far, companies with a single point of excellence solution, such as Confluent, have had problems maintaining their higher growth rates while becoming profitable or generating free cash flow and coming close to the desired “Rule of 40” state again.

Part 3 will cover stocks, ETFs, options I like and hold or intend to buy, and an introduction to trading as a service that I intend to start later this quarter. It also provides a view into the portfolios I have constructed for different types of investors. It is for newsletter subscribers. Please click the link to sign up. It is free: https://lnkd.in/eRzNJ5M9.

Technical Indicators

Weighted Close

Indicator Type: Overlay - Interactive Charts Only

The Weighted Close indicator is the average of each day's price; combining the high, low, and closing prices to create a line chart can take into account actions that occurred throughout the day that a reclose-only line chart would not allow. Extra weight is given to the closing price.

Calculation:

((Close * 2) + High + Low) / 4

Weighted Alpha

Barchart's Weighted Alpha indicates how much a stock has risen or fallen over the past 250 trading periods, allowing traders to quickly spot stocks or sectors that have shown a strong rally over the past months and which may continue to rally.

In the most simplistic terms, the Weighted Alpha is similar to a 1-year percent change, but in reality, the Weighted Alpha is a lot more nuanced than that. The weighted analysis combines the input data into different trading periods. Then, it assigns a weight to each trading period, with a lesser weight applied to the oldest period and a higher weight applied to the most recent period. Barchart then calculates a modified percent change for each trading period, with a cap on how much any specific period can affect the total result, thus eliminating large price jumps from the calculation. The Weighted Alpha is the sum of the totals of the weightings multiplied by the modified percent change for each trading period.

A stock with a positive weighted alpha will likely have seen a price increase over the past several months. A stock whose price has not changed in the period will have a small Weighted Alpha, either positive or negative, and a stock whose price has dropped over the most recent period will have a negative Weighted Alpha.

The Weighting dictates that more recent price changes will significantly affect the result more than similar price changes from earlier periods, thus giving precedence to more recent price activities. Combining data into different trading periods helps smooth out the input data so that one price move alone is often not enough to move the needle. The capping of the ability of any specific trading period to affect results helps eliminate sharp moves from distorting the results, creating a smoother indicator.

ETFs

Vaneck Semiconductor ETF (SMH)

The VanEck Vectors Semiconductor ETF seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS US Listed Semiconductor 25 Index (MVSMHTR), which is intended to track the overall performance of companies involved in semiconductor production and equipment.

Nasdaq 100 Technology Index Fund (QTEC)

The First Trust NASDAQ-100-Technology Sector Index fund is exchange-traded. The investment objective of the Fund is to replicate as closely as possible, before fees and expenses, the price and yield of the NASDAQ-100 Technology Sector Index. The equal-weighted index is rebalanced four times annually in March, June, September, and December.

S&P 500 EW Technology Invesco ETF (RSPT)

The Invesco SP 500 Equal Weight Technology ETF seeks to replicate the SP 500 Equal Weight Information Technology Index performance as closely as possible, before fees and expenses.