FANG splits Wall St

Sure enough, the return of Wall St. to work on Tuesday, following Martin Luther King Jr. day on Monday, brought a long-awaited bounce for technically […]

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By :  ,  Financial Analyst

Sure enough, the return of Wall St. to work on Tuesday, following Martin Luther King Jr. day on Monday, brought a long-awaited bounce for technically ‘oversold’ stock indices and oil markets.

But as we know, such gauges can maintain apparently imbalanced states for much longer than theoretically expected.


More oil, more China

That’s especially true for global stock markets right now.

They have latterly tracked twin pillars of plummeting crude oil prices and their counterparts in China as their main pointers.

In the last few days, a probable near-term jump in Iranian crude exports after the lifting of sanctions added to existing concerns about a global oil glut.

Elsewhere, data out on Tuesday showed the weakest economic growth in China for a quarter of a century.

Whilst markets hope for further economic stimulus as a consequence, that will probably mix with fears of disappointment.

These worries will keep global indices skittish in the near term



Dow dives deeper

Beneath this broadly negative sweep, there are important further differentiations between the largest US stock indices.

One of particular interest is that the Dow Jones Industrial Average has outpaced peers on the downside.

This is evident from the widely used 200-week moving average, a ‘second resort’ for establishing relative strength, especially during times of market stress, when many assets have already surpassed the first fall-back, the 200-day moving average.


At last look, the Nasdaq 100 index traded some 550 points, or 13%, away from its 200-week moving average, at 4123.

The S&P 500 was 3% above its 200-week around 1871, having narrowed the gap sharply over the last few sessions.

DJIA however, was already well-acquainted with life below the barrier, having fallen under it (again) on 30th December.

It traded 8.6% beneath the 200-WMA at 15936.




Total ‘returns’?

There are well-known reasons for DJIA’s underperformance, namely slim technical representation of the wider US stock market.

This rightly casts DJIA as the least materially important US stock market for most participants.


As well, DJIA’s subjectively constructed nature played against it in 2015, in terms of ‘total returns’.

(These are stand-alone price gains combined with reinvested dividends).

No global index covered itself in glory last year—the benchmark S&P 500 returned 1.38%—but Dow pickings were even slimmer at 0.21%.


Still, thinking about these results in another way, we discover that DJIA currently shares a connection with S&P 500 which gives the narrow list a relevance that is more than symbolic and historical.

We start by acknowledging a split a split between S&P 500’s so-called ‘value’ stocks and so-called ‘growth’ stocks’ in 2015.

And, if we segment the groups into a ‘value S&P 500’ and a ‘growth S&P 500’, the former’s performance would be even worse than DJIA’s



FANGs for the win

We define ‘value stocks’ as those that traded below a nominal ‘intrinsic value’—characterised by strong capitalisation and good earnings.

For ‘growth’, we mean pretty much the inverse of the above—think Netflix, for example.

Digging into the ‘value’ group we find a negative ‘total return’ of 3.1% in 2015.

At the same time, ‘growth’ stocks on aggregate returned more than 5%.


It was further evidence of the widely observed demise of broad stock market strength in 2015.

In other words, we could state that fewer stocks outperformed, as even many of the soundest US companies were unjustifiably caught up in a global net of negative sentiment.

Conversely, that underperformance was also reflected by outperformance of Wall Street’s much-storied ‘FANG’, AKA Facebook, Amazon, Netflix and Google.





Please click image to enlarge



Watch Netflix

Their leadership was indirectly important for such markets as the Dow—which have no FANGs, so to speak.

Netflix earnings coming shortly would therefore set up a further de facto test for the S&P 500, in the event that the numbers disappoint.

(With NFLX having risen 134% in 2015 and its price/earnings ratio close to 300 times FY2016 GAAP earnings, scope for disappointment seems considerable.)

Quarterly results during the next couple of weeks or so from the remainder of the toothy quartet could have the same effect on the relatively outperforming S&P 500.



Short-term roof of Wall St

In the meantime, the DJIA looks like it continues to map out a possible fate of the more closely followed SPX.

Short-term trading by City Index clients of the Wall Street Daily Funded Trade, a close cousin of DJIA, showed the bears back in control at online time.

The red descending trend in the image below goes back to early in the month.

It was tested for the third time early on Tuesday.

On the other hand, the current session has had a more poised tone overall.

That is evident in the two times this trade has respected support formed by 38.2% (15892) by extension, of the down move last week—16483-15839.

Still, absent definitively encouraging news for global stock markets in the near term, the chances of Wall Street breaking above its medium-term trend still seem slim.

That creates risk of a break down to complete the extension—perhaps in a few sessions—at least around 15494.






Please click image to enlarge



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