foxex: Relative Strength

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Chart Advisor | Focus on the Price

By James Chen, CMT

Friday, May 22, 2020

1. Stocks Retain Momentum: Big Tech Still Shines, Small Caps Still Lag

2. Relative Sector Performance

3. Trending Technical Analysis Topics

(Programming note: We will be off on Monday for Memorial Day, but back in your inbox on Tuesday. Have a safe and happy weekend.)

Market Moves

Price action in the equity markets this past week was choppy and indecisive, lacking any discernible trend. Even so, the S&P 500 closed on Friday over 3% higher than the close of the previous week. In the process, the benchmark equity index hit a high (around 2980) that has not been seen since early March. In technical analysis parlance, this is known as a confirmation of a bullish trend continuation, or a higher high.

To put this into context, since the pandemic low of March 23, the S&P 500 has climbed a full 34% in just around two months. This dramatic rise, of course, follows an even more dramatic fall in February and March. The current rebound and recovery coincides with the beginnings of a reopening of the U.S. economy, despite increasing signs of massive economic distress.

While the S&P 500 index of large cap stocks has undoubtedly performed exceptionally well in the current rebound, the tech-heavier Nasdaq Composite has done even better. Since its own March 23 low, the Nasdaq has climbed around 40%, driven mostly by a wealth of big tech names.

Interestingly enough, the small-cap Russell 2000 index has also risen around 40% from its trough. But as we can see from the comparison chart below of the S&P 500 ETF (SPY), Nasdaq 100 ETF (QQQ), and Russell 2000 ETF (IWM), the small caps are still far below their February highs. Why is this? Due to the coronavirus pandemic and its accompanying economic implications, the small-cap Russell 2000 plunged significantly further than its large-cap counterparts. This is understandable, as smaller companies with fewer resources and less capital to weather the storm have been disproportionately impacted by the economic shocks brought on by the pandemic.

As the chart below shows, small caps have a lot more territory to recover than large caps (and especially large tech stocks) to get back to anywhere near February market highs.

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Relative Sector Performance

Speaking of performance since February market highs, the chart below details how the market sectors have performed since then. This is akin to the concept of relative strength, which pits companies in the same industry, or sectors in the same index, against each other.

In this case, the ETFs here represent different sectors of the S&P 500 index. All sectors are still significantly below February market highs, but some are much worse off than others. It's no surprise that health care and technology top the list, as large companies in these sectors have clearly been able to weather the pandemic much better than others. Also unsurprising is the fact that financials and energy lag all others, as interest rates and oil prices, respectively, have been hit extremely hard by the current economic crisis. Somewhat more surprising is the fact that the consumer discretionary sector has recovered relatively well thus far, even edging out consumer staples during a time that one might think the opposite would be true.

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Trending Technical Analysis Topics

Here at Investopedia, we've seen reader interest in technical analysis topics spike sharply throughout the past few weeks and months. Trading volumes have soared during the current economic crisis as experienced traders become even more active and new traders open brokerage accounts in droves. So every week, we issue an article on the top trending technical analysis articles for the past week. This week, we've seen spiking interest in old standby patterns like the "triple top" and "cup and handle." The always-popular Fibonacci retracements and MACD have also been trending. The table below provides a glimpse at what readers have been interested in the most this past week.

The Bottom Line

Stocks have made a dramatic recovery since the late-March lows, with big tech names clearly taking the lead. While small caps have also recovered well, they have a much steeper hill to climb. Overall, though, U.S. equities have shown a technical confirmation of a potential bullish trend continuation this past week. Some of the various equity sectors have done much better than others in the current market recovery, most notably health care and technology. On the other side of the spectrum, financials and energy have a long way to go. Finally, with all of the market volatility in the past few months, interest in trading and technical analysis has soared. While longer-term investors may have a strong aversion to the exaggerated market moves that have been the rule of late, shorter-term traders tend to prefer them.