I see comments, often over the last few months, that a stock such as Amazon (AMZN) or Meta (FB) has gone nowhere for months on end. And the conclusion is that ultimately the stock should resolve to the upside. Yet when they look at the chart of the Russell 2000, which has gone nowhere for a year, often the conclusion is that the chart should resolve to the downside.
Is that a bias? Small-caps are ultimately doomed, they say (too much debt is often the narrative I hear), and the big-cap tech stocks are the future. That's a sentiment tell in itself, isn't it? The fact that folks tend to favor big-cap tech over smaller growth type names. I think it's probably recent bias more than anything else since small-cap growth has been a pariah for nearly three months now.
But I thought of that this weekend when it occurred to me that the S&P 500 is trading exactly where it was in early November. That's a bit more than two months of sideways, with no rally or decline lasting longer than a few weeks at most, usually less. Yet under the surface there has been an awful lot of action. Just look at iShares Expanded Tech-Software (IGV) , an ETF to be long software stocks, which shows an awful lot of movement under the surface.
As I stared at the chart of the Sentiment Cycle that my mentor, Justin Mamis, put together more than three decades ago, I was struck how you could surely overlay it with the chart of Energy Select Sector SPDR (XLE) , an ETF to be long energy stocks.
The June high was definitely enthusiasm as everyone was sure Covid was behind us and the world was getting back to normal. Then Delta arrived and down energy went. The July low was Panic, the August low was discouragement and I would posit the September decline was aversion. Although I could be convinced that the October rally was the wall of worry and the December decline was aversion. In any event, this latest move up is clearly returning confidence. How do I know? There is plenty of talk of $100 oil now. Last summer and fall the talk was environmental, social and governance, electric vehicles and the end of fossil fuels. In addition, the Daily Sentiment Index for oil is at 85. As a reminder, a reading in the upper 80s is a yellow flag and a reading over 90 is red.
Let me add one more tidbit, which has nothing to do with sentiment. It's how we measure price targets on charts. We take the high of the pattern, so let's use the June high at 54 and we subtract the low (the August low was 44) and we get 10. We then add the difference (10) onto the breakout (54) to get a target area which in this case is 64.
Let's then measure the move from October to December. The high was 58 while the low was 52. That's 6. Six added onto 58 is also 64. Energy Select Sector SPDR closed just over 64 on Friday.
Quite frankly, I think energy stocks need a correction and we will like them again (notice enthusiasm is still 'out there') but my point in this exercise is that the Either/Or Market remains intact. Either big-cap tech and growth is rallying and everything else is sitting it out or vice versa.