Weekly Perspectives: Why Software Is Saving The World

Weekly Market Outlook For July 13 – 17, 2020 – Prepare For Earnings Season
July 11, 2020
Weekly Market Outlook For July 20 – 24, 2020 – All About The Earnings
July 18, 2020
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Weekly Perspectives:  Why Software Is Saving The World

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Here is your weekly newsletter — perspectives on trading and financial markets.

Click here for the previous edition.

 

Prepare For Earnings Season 

In case you missed it, this past week demonstrated once again that we are in a wildly bullish market.

The Nasdaq closed the week near the all-time highs once again running over all doubters and rising on the strength of strong tech names like AMZN, NFLX, AAPL, and TSLA.

When the market’s trend like this sometimes the hardest part is to ignore all the external noise and simply follow price.

As we enter the earnings season all eyes will be on the data points coming out on the major banks who report early in the week and NFLX on Thursday.

It promises to be a volatile week so get ready, strap in, and trade safe.

In this week’s video I discuss:

  • The upcoming economic calendar and earnings names to watch this week
  • Why it’s a bad idea to try to call the top in this market
  • How we saw the potential move in emerging markets in last week’s video
  • How the potential for a negative divergence between the S&P500 and its internals will likely form if we hit all-time highs


 

 

 

Now watch this week’s Weekly Outlook video to see the setups and levels we’ll be watching as well as the technical outlook for the VXX SPY QQQ IWM DIA EEM TSX TLT GLD MGC BTCUSD EEM and more for the week of Weekly Market Outlook For July 13 – 17, 2020.

 

Why Software Is Saving The World

As I alluded to above and in this week’s Market Outlook video tech is having a runaway year not only outpacing the other indices but seemingly buoying the entire world economy.

Marc Andreessen’s once famously remarked that “software was eating the world“? 

Now software isn’t simply eating the world. Software is saving the world—and buoying portfolios like no other sector of the economy.

Tech stocks were the best place to hide during the market’s Covid-19 turmoil. Here are the year’s best performing U.S. tech stocks with a market value of at least $5 billion.


 

Explaining the 2020 Stock Market

A lot of traders and investors are scratching their heads trying to understand how we could have come so far so fast after the large downswing in Q1 and upswing in Q2.  

Here’s one take from A Wealth of Common Sense –

Understanding the U.S. stock market in 2020 is fairly easy — the bigger, more expensive companies are performing better than the smaller less expensive companies. That’s it.  

But the performance of the individual components of the market is all over the map and the borders for that map can be drawn neatly by company size.

Here’s a look at the S&P 500 broken down by market cap showing the median size, price-to-earnings, prices-to-sales, price-to-cash flow, price-to-book value and year-to-date returns as of the close on Friday:



 There is a clear pattern at work here. The biggest companies by market cap are the most expensive by traditional valuation metrics and they also have the best returns this year.  

The smallest companies by market cap are the least expensive by traditional valuation metrics and they also have the worst returns this year.  

The market doesn’t always line up so perfectly by size but this year’s performance attribution is crystal clear.   Considering the median stock in the index is down 11% on the year, the fact that the market is more or less flat can be explained exclusively by the biggest companies holding the highest weights in the S&P.

The top 50 (and really the top 10) stocks have more than made up for the larger median losses in the rest of the market.  

There are two ways to look at this data:

  • 1) The S&P 500 is so top-heavy that once these stocks falter, look out below.
  • (2) This is the nature of a market-cap weighted index where the winners carry the day without having to pick them in advance.  

Source: A Wealth of Common Sense

 

Quote I’m Taking Time To Consider

“Life might be a race against time but it is enriched when we rise above our instincts and stop the clock to process and understand what we are doing and why.  A wise decision requires reflection, and reflection requires a pause.”  

Source:  Farnam Street / Financial Times

 

Stay strong, and happy trading!

Houston

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Weekly Perspectives: Why Software Is Saving The World

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