MorningWord 7/23/15: Crank up the crazy and rip off the knob $QQQ

by Dan July 23, 2015 9:44 am • Commentary

I n 2015, the Nasdaq Composite  is the runaway U.S. equity winner.  You know the score there, some of the largest mega cap biotech & tech stocks in the market weighted average index are up huge year to date; AAPL up 13.5%, AMZN up 57%, CELG up 23%, CMCSA up 11%, FB up 25%, GILD up 25%, GOOGL up 31%.  Those seven stocks make up more than two trillion in market cap, and are clearly doing a lot of the heavy lifting driving the Index’s 9% ytd gains, as many large components in tech are in correction territory and do not rally with the market (see CSCO, INTC, ORCL, MSFT, QCOM). You have a situation that should not be unfamiliar to those who have lived through late stage bull markets, concentrated large winners, declining breadth and growing divergences.  Two guys I follow on Twitter, and really like their work, Dana Lyons and The Northman Trader have been tracking these divergences:



Parabolic moves in stocks like AMZN, FB, GOOGL & NFLX are anything but healthy for the broader market. Even if you own them, they are masking a lot of very poor performance in other parts of tech, or for the rest of the market for that matter.  I don’t think any of these guys, or myself for that matter is highlighting the stark realities within the Nasdaq to spook anyone, but the 9% ytd performance sticks out like a sore thumb to the S&P 500’s 2.7% ytd gains, and can obviously be attributed to what I would call a small group of universally loved, increasingly valuation challenged stocks that have become unhinged from reality.

So what to do with this post? Be aware of this divergence. If you’re fortunate enough to own some of the names that are going parabolic, perhaps it’s time to look at stock replacement strategies that offer continued upside potential but define your risk going forward. The key here to understand is that these divergences can continue for some time, and what you think is silly now might get downright crazy. And I am not sure it makes a ton of sense to try to play catch up in stocks like INTC, ORCL and QCOM they may be more telling for the future direction of the Nasdaq than that of a small hand-full of stocks that appear to be doing a ton of work for the broad market.

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