The US Stock Market is dominated by large multinational companies with hundreds of billions in market capitalization. It is a common misconception that leadership from these mega-cap names is an indicator of weak market internals. To the contrary, investor interest in these popular stocks is a characteristic of a healthy bull market as their performance correlates very closely with the major indexes.
Todd Sohn of Strategas Research said it best when discussing the FANG names on Technical Analysis Radio last year.
“They are the best players on the team, they should be scoring all the points. But, that’s not to say the market is narrow.”
The Chart Report’s MAGA Index is a custom, equal-weighted benchmark of the four largest companies in the US (and world) that we use to gauge the strength of the market’s biggest and “best players,” Microsoft, Apple, Google and Amazon.
The TCR MAGA Index has failed at its 2018 highs just above 500 several times in the last year. In July, it made a slight new all-time high ~515 before retracing back into its prior trading range and confirming a failed breakout and negative momentum divergence.
But the dominant trend is still higher in this Index and quadruple tops are not something we see too often.
As shown in the longer-term chart above, prices have trended aggressively higher, from 30 to over 500 off their Financial Crisis lows. As such, a year of consolidation can be viewed as a constructive development in order to digest a decade-worth of gains and work off the momentum divergences in place on both the daily and weekly timeframes.
The four companies in this index have a combined market capitalization in excess of $3.6 trillion. This represents roughly 12% of the total US Equity Market capitalization which stands around $30 trillion. This means these stocks have a huge weighting in all of the major indexes and it is hard not to have exposure to them if you are an investor in the US. It also means that their participation or lack thereof is paramount to the performance of the broader market.
If these four stocks are moving higher, so should the S&P 500. The chart below illustrates just how tightly the two indexes have trended together in recent years.
Negative divergences, or a lack of confirmation from one of the two indexes have preceded several corrections since 2015. The two indexes are currently in a period of confirmation as even though neither was able to hold its recent high, they both achieved a higher high in July. While this is definitely not a trading signal, it is evidence of healthy participation from the most important stocks in the market. We’ll continue to monitor this price action closely as the MAGA Index breaking to new highs would likely occur in an environment where US Equities finally resolve higher from their current trading range.
Hope you enjoyed this post! As always, reach out to me at Strazza@thechartreport.com with any questions or comments.