This post was written exclusively for Investing.com
The post has risen dramatically since the March lows, but cracks are emerging, suggesting the recent bull run is in serious danger. There have been some discrepancies in recent weeks that indicate that the recent rally may be due to just a handful of stocks. If that turns out to be the case, next week's earnings could prove critical.
As the S&P 500 ETF (SPY (NYSE :)) rises, the small-cap ETF (NYSE 🙂 lags, as does the Emerging Markets ETF (NYSE 🙂 and the All-World EX-US ETF (NASDAQ) :).
The significant increase in the S&P 500 seems to be more due to companies like Microsoft (NASDAQ :), Amazon.com (NASDAQ :), Apple (NASDAQ 🙂 and Alphabet (NASDAQ 🙂 pushing higher . These four companies have a weighting of almost 18% in the S&P 500 SPDR ETF.
Outperforms SPY, IWM, EEM, ACWX 300-minute price chart
As of March 23, the S&P 500 ETF has risen more than 25%, while the Russell 2000 ETF has grown by 20.5%, the Emerging Markets ETF by 16.3% and the All-World EX US by 17, 9%. Earnings in the S&P 500 appear to perform unevenly better than the other groups, suggesting that the recent rally favored only the largest stock market companies.
Leading the way
Amazon is by far the most influential performer since the low of March 16, rising over 41.9%, while Microsoft has risen 26.6% and the S&P 500 has risen 16.4%. These two stocks have been instrumental in the recovery of the S&P 500, and if they faltered this could be a significant brake on the overall market.
SPY, AMZN, BiederL, MSFT, APPL 300-minute price chart
Apple and Alphabet increased by 14% and 17.9% respectively in the same period. Not necessarily contributing to the overall rise in the markets, but certainly to support the rally. The strong performance of these four stocks and their oversized weightings have contributed to the shares having increased disproportionately to other market segments; it seems.
The crucial point is that each of these four companies reports quarterly results in the week of April 27. Results will be on April 28, April 29 and both and April 30. It means that next week is likely to be a crucial one for the market and will likely set the tone for what could be the coming weeks.
It can also endanger the market if one of these four companies seriously misses the results or gives a bleak view of their current state of affairs. It could cause the recent outperformance of the large-cap S&P 500 to reverse much of its recent gains. But because of the outperformance in recent weeks, this could lead to a sharper and steeper decline.
Likewise, positive results and views on a better economic landscape could help push prices even higher. That would widen the gap between the S&P 500 and the other segments.
Due to the uncertainty and turmoil caused by the coronavirus outbreak, the current situation is full of multiple risks. These four companies are the largest in market capitalization in the United States and have the resources to survive the current economic downturn. This is almost certainly one of the main factors driving investors to flow in these four stocks.
But it also means that anything that goes against that belief could very quickly steer these stocks and the market in a lower direction.
Disclaimer: Michael Kramer and the customers of Mott Capital own Microsoft, Apple and Alphabet
