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Chart Advisor: Unsustainable Overconcentration


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Thursday, August 13, 2020 Headlines

1.Metals rebound as stocks trade in tight range

2. NVDA maintains strong trend with earnings ahead

3. Silver prices may be sending a message

Market Moves

Precious metals rebounded to a degree as stocks traded in a tight range today. But growing evidence suggests investor money may be getting too highly concentrated into some tech stocks. Though the S&P 500 index (SPX) closed .2% lower and the Nasdaq 100 (NDX) closed .2% higher, Apple (AAPL) still gapped up and closed 1.77% higher in today’s session. Is it possible that investors may be showing a bit too much concentration in their investment decisions?

The chart below shows an interesting comparison of technology sector stocks. The chart features four panels (click for full size) including Apple and Microsoft (MSFT). The other two panels include two measures that do not include those two stocks. The upper left panel shows the price action of the top 10 holdings in the Nasdaq 100 (excluding AAPL and MSFT). The lower right panel shows how State Street’s Technology Sector index ETF (XLK) compares in its relative performance to AAPL and MSFT if those two were not part of its portfolio. That panel shows that the rest of the sector has lagged behind those two by a full 15% year to date. It is hard to overlook just how weak everything else looks in this comparison to the most heavily weighted stocks in the index. This over-concentrated strength may suggest that tech stocks will run into resistance soon. 

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NVDA Maintains Strong Trend with Earnings Ahead

Investopedia contributor Alan Farley writes an insightful observation that Nvidia (NVDA) seems primed to announce a stock split. It’s not a bad suggestion to consider as the company reports earnings next Tuesday and has nearly reached its Fibonacci price target based on its trend from the previous earnings call (see chart below).

Silver Prices may be Sending a Message

If precious metals are likely to meet with resistance, the one most likely to show signs of trouble would be the one with the most volatility. Right now that metal would be silver. The chart below tracks iShares’ Silver Trust ETF (SLV). The Connors Relative Strength Index (CRSI) indicators shows that the strength of the trend has been weakening even as the price moves drastically higher. Meanwhile the Average True Range (ATR) indicator below shows that the price volatility is increasing. The combination of these two indicators behaving this way is typically bearish, and may suggest a continuing pullback in silver prices, which would imply a similar fate for other precious metals.

The Bottom Line

Stocks traded in a tight range today while metals rebounded a bit. But the price action in stocks shows that tech stocks, and in particular Apple and Microsoft, are snapping up the lion’s share of investor money. When these two are removed from the index equations, the remaining price action looks surprisingly weaker.

Originally Published on August 13, 2020

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