As we entered the year 2022, I said what I always say: I am terrible at these annual predictions but I will offer up that, based on the charts, it looked as if we'd have a year with a lot more volatility than we'd had. My reasoning was that the chart showing the ratio of the S&P 500 relative to Nasdaq had changed.
That blue line was on the verge of being broken, giving the ratio a higher high (green arrow). Rarely is my timing so perfect but you can see that once this ratio, which actually made its low in early 2021 moved up it has literally become a one-way street, much the way once it moved down it was a one-way street in the other direction. The year 2021 was the transition year. That is the Either/Or Market I have written so much about.
When the mega cap stocks are moving up, they do so at the expense of almost everything else. At the time I thought a market where over 25% of the market cap was 'owned' by a handful of stocks had to change. In 2022, that did change. Spoiler alert: I don't see anything on this chart - not yet - that says we're going back to the way we were before 2022.
It is possible that 2023 will be a transition year as 2021 was, but it is too soon to tell. We would need to see a lower high in the ratio, something we haven't seen yet.
The one thing I do know is that consensus for 2023 is nearly unanimous that the first half of the year will be choppy to down and the year will be better in the second half. Thus far, I have not seen anyone use that old Wall Street expression about the year being back-end loaded, but I am certain if these folks are correct that the first half is bad, then we will hear that phrase non-stop.
How can the consensus be correct? It's possible but it is more likely to do something to get the majority of minds changed. Remember, in October everyone had 4,100 as their S&P target; at the time I said no way everyone is correct, either we never make it to 4,100 or we blow right past it. And sure enough, after the November CPI and the Powell speech the calls for 4,300 came out of the woodwork. Yet their October call was correct: 4,100 was the top of that rally. Markets do their best to humble us all.
Right now, we have a market that has essentially gone nowhere for the last two, nearly three weeks. If we step back the S&P is basically where it was in May and June.
Now I'd like you to take a look at the chart of the PowerShares QQQ Trust (QQQ) , which are holding on by a thread. The bulls will see the blue line. The bears will see the black line. In my view this is the chart to watch because if it can get through the black line, then something has changed because in the last several months, even the tiniest amount of resistance has kept a lid on this well watched ETF.
But I would also like to draw your attention to the Invesco Nasdaq Next Gen 100 (QQQJ) . It doesn't trade much, but it is the non-mega cap names, the Juniors (next generation), since it has pretty much tracked the trajectory of the QQQs until November/December. They did not come down and retest the October lows the way the QQQs did. When two charts move in similar fashion and then diverge that's when I start paying attention. If the divergence continues then there are clues to how the market will be in 2023.
Sometimes it is helpful to see it in a ratio form. Here you can see the QQQ relative to the QQQJ went sideways for most of 2022 but in early November it fell out of the bottom as folks sold those mega-cap names. For now, this is the chart I'm focused on to see if there will be a change underfoot in the market.
