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Cracking the Code: 5 Segments to Determine Future Market Direction
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A Major Market Dichotomy
In ordinary years on Wall Street, the direction of the stock market dictates the direction of stocks. Typically, three in four stocks follow the general market direction. Furthermore, the broad indices tend to trade in tandem. For example, though they may not replicate each other’s performance exactly, usually, if small caps are higher, the Nasdaq and larger caps are higher too.
Considering the above, 2023 is one of the most unique markets in recent years. While most major indices are higher thus far, 60% of stocks are below their 200-day moving averages. The Russell 2000 Index ETF (IWM) is lower by a half percent, while the S&P 500 Index ETF ((SPY - Free Report) ) is higher by 8%, and the tech-heavy Nasdaq 100 ETF ((QQQ - Free Report) ) is higher by more than 20%.
Image Source: Zacks Investment Research
Pictured: Small caps are lagging the other major indices.
Clearly, Wall Street is sending mixed signals. However, investors can get a better idea of where the market is going by looking beyond the major indices and focusing on these 5 segments:
Regional Banks
So far, the “Black Swan” of 2023 is the underperformance in small caps caused by the regional banking sector’s woes. The SPDR Regional Bank ETF (KRE) is lower by nearly 40% year-to-date and is approaching prices not seen since the COVID-19 pandemic.
Image Source: Zacks Investment Research
Pictured: KRE has been a huge weight on the general market indices and investor confidence.
Regional banks such as Silicon Valley Bank (SI), First Republic Bank (FRC), and Signature Bank of New York ((SBNY - Free Report) ) were not properly positioned for such a “hawkish” Federal Reserve and either went under or got bought for pennies on the dollar by stronger, better-capitalized banks such as JP Morgan ((JPM - Free Report) ) and First Citizens Bank ((FCNCA - Free Report) ).
Image Source: Zacks Investment Research
Pictured: FCNCA is up more than 100% since acquiring Silicon Valley Bank.
Though the general market has been able to shrug off the weakness thus far, the sector will need to stabilize if U.S. markets are to continue higher.
Semiconductors
One of the best comeback stories of 2023 is the re-emergence of the semiconductor space. After a brief earnings slowdown in the tech bear market, earnings expectations have increased as AI mania takes hold.
Image Source: Zacks Investment Research
Pictured: Recent revisions paint a rosy picture for chip leader Nvidia.
AI is a key growth driver of the current market and semiconductors play a crucial role in advancing AI technology and are a necessary ingredient for AI players to produce enhanced processing power and increased efficiency. Advanced Micro Devices ((AMD - Free Report) ), Nvidia ((NVDA - Free Report) ), and Rambus ((RMBS - Free Report) ) are three key names in the industry to watch. Investors can also track semiconductor ETFs such as the VanEck Semiconductor ETF (SMH).
Big Tech
Cash-rich, big tech is where all the institutional investors are parking their money. In fact, Apple ((AAPL - Free Report) ) and Microsoft ((MSFT - Free Report) ) have grown so large that their combined market cap is larger than all the stocks in the Russell 2000 Index combined. That said, thus far, the performance has not spread to smaller tech stocks. While QQQ is near 52-week highs, the Nasdaq 100 Equal Weight Index ETF (QQQE) is well off the 52-week highs achieved in February. However, Monday, QQQE outperformed and retook its 50-day moving average – a bullish sign.
Image Source: Zacks Investment Research
Pictured: QQQE has lagged but is showing signs of life.
To sustain a market uptrend, bulls will either need to see continued outperformance in mega-cap tech names such as Meta Platforms (META), Alphabet (GOOGL), and Oracle ((ORCL - Free Report) ) or broader participation from small to mid-cap tech stocks. Ideally, a sustainable bull market would have both parties involved.
Bitcoin & Crypto
Whether you trade crypto or not, it is worth watching for sentiment purposes. Bitcoin and other crypto assets are speculative assets that tends to rise when investors have a larger risk appetite. For much of 2023, when Bitcoin or Bitcoin proxies such as Marathon Digital (MARA), MicroStrategy (MSTR), and ProShares Bitcoin ETF (BITO) have risen, equity markets have followed suit.
Gold
Precious metals are often viewed as safe-haven assets. Countries like Russia and China are trying to break away from the world’s reserve currency, the U.S. dollar. Will they find success? It’s up for debate, but investors can watch the action of gold to find clues. The SPDR Gold Shares ETF ((GLD - Free Report) ) is attempting to break out of a multi-year base.
Image Source: Zacks Investment Research
Pictured: Gold is on the brink of breaking out of a multi-year base structure.
Regardless of what gold does, investors should remember that occasionally gold and equity markets can march to the same rhythm. In other words, if gold breaks out, it is not necessarily a nail in the coffin for equity markets. Either way, the precious metal provides a good hedge and diversification tool at current levels.
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Cracking the Code: 5 Segments to Determine Future Market Direction
A Major Market Dichotomy
In ordinary years on Wall Street, the direction of the stock market dictates the direction of stocks. Typically, three in four stocks follow the general market direction. Furthermore, the broad indices tend to trade in tandem. For example, though they may not replicate each other’s performance exactly, usually, if small caps are higher, the Nasdaq and larger caps are higher too.
Considering the above, 2023 is one of the most unique markets in recent years. While most major indices are higher thus far, 60% of stocks are below their 200-day moving averages. The Russell 2000 Index ETF (IWM) is lower by a half percent, while the S&P 500 Index ETF ((SPY - Free Report) ) is higher by 8%, and the tech-heavy Nasdaq 100 ETF ((QQQ - Free Report) ) is higher by more than 20%.
Image Source: Zacks Investment Research
Pictured: Small caps are lagging the other major indices.
Clearly, Wall Street is sending mixed signals. However, investors can get a better idea of where the market is going by looking beyond the major indices and focusing on these 5 segments:
Regional Banks
So far, the “Black Swan” of 2023 is the underperformance in small caps caused by the regional banking sector’s woes. The SPDR Regional Bank ETF (KRE) is lower by nearly 40% year-to-date and is approaching prices not seen since the COVID-19 pandemic.
Image Source: Zacks Investment Research
Pictured: KRE has been a huge weight on the general market indices and investor confidence.
Regional banks such as Silicon Valley Bank (SI), First Republic Bank (FRC), and Signature Bank of New York ((SBNY - Free Report) ) were not properly positioned for such a “hawkish” Federal Reserve and either went under or got bought for pennies on the dollar by stronger, better-capitalized banks such as JP Morgan ((JPM - Free Report) ) and First Citizens Bank ((FCNCA - Free Report) ).
Image Source: Zacks Investment Research
Pictured: FCNCA is up more than 100% since acquiring Silicon Valley Bank.
Though the general market has been able to shrug off the weakness thus far, the sector will need to stabilize if U.S. markets are to continue higher.
Semiconductors
One of the best comeback stories of 2023 is the re-emergence of the semiconductor space. After a brief earnings slowdown in the tech bear market, earnings expectations have increased as AI mania takes hold.
Image Source: Zacks Investment Research
Pictured: Recent revisions paint a rosy picture for chip leader Nvidia.
AI is a key growth driver of the current market and semiconductors play a crucial role in advancing AI technology and are a necessary ingredient for AI players to produce enhanced processing power and increased efficiency. Advanced Micro Devices ((AMD - Free Report) ), Nvidia ((NVDA - Free Report) ), and Rambus ((RMBS - Free Report) ) are three key names in the industry to watch. Investors can also track semiconductor ETFs such as the VanEck Semiconductor ETF (SMH).
Big Tech
Cash-rich, big tech is where all the institutional investors are parking their money. In fact, Apple ((AAPL - Free Report) ) and Microsoft ((MSFT - Free Report) ) have grown so large that their combined market cap is larger than all the stocks in the Russell 2000 Index combined. That said, thus far, the performance has not spread to smaller tech stocks. While QQQ is near 52-week highs, the Nasdaq 100 Equal Weight Index ETF (QQQE) is well off the 52-week highs achieved in February. However, Monday, QQQE outperformed and retook its 50-day moving average – a bullish sign.
Image Source: Zacks Investment Research
Pictured: QQQE has lagged but is showing signs of life.
To sustain a market uptrend, bulls will either need to see continued outperformance in mega-cap tech names such as Meta Platforms (META), Alphabet (GOOGL), and Oracle ((ORCL - Free Report) ) or broader participation from small to mid-cap tech stocks. Ideally, a sustainable bull market would have both parties involved.
Bitcoin & Crypto
Whether you trade crypto or not, it is worth watching for sentiment purposes. Bitcoin and other crypto assets are speculative assets that tends to rise when investors have a larger risk appetite. For much of 2023, when Bitcoin or Bitcoin proxies such as Marathon Digital (MARA), MicroStrategy (MSTR), and ProShares Bitcoin ETF (BITO) have risen, equity markets have followed suit.
Gold
Precious metals are often viewed as safe-haven assets. Countries like Russia and China are trying to break away from the world’s reserve currency, the U.S. dollar. Will they find success? It’s up for debate, but investors can watch the action of gold to find clues. The SPDR Gold Shares ETF ((GLD - Free Report) ) is attempting to break out of a multi-year base.
Image Source: Zacks Investment Research
Pictured: Gold is on the brink of breaking out of a multi-year base structure.
Regardless of what gold does, investors should remember that occasionally gold and equity markets can march to the same rhythm. In other words, if gold breaks out, it is not necessarily a nail in the coffin for equity markets. Either way, the precious metal provides a good hedge and diversification tool at current levels.