Market Radar 15. May 2023

Is the U.S. dollar now causing the price of equities to slide?

IPO stocks are relatively strong across the market
For the ETF Renaissance IPO (IPO), we gave the day stamp “Buy or top-up” in last Monday’s column. Anyone who had entered Wall Street at $28.25 on Monday would have enjoyed a gain of almost 4% on Thursday evening (daily close on Thursday: $29.37). On Friday, however, the IPO ETF buckled and fell back to $28.75. The market radar now sees a swing long opportunity in the IPO ETF.

20% of the IPO ETF is in just two stocks: Snowflake (SNOW) and AirBNB (ABNB). So these two stocks determine one-fifth of the performance in this ETF: Snowflake was weighted at 11.72% in the ETF as of Friday’s close. AirBNB was weighted at 8.51% as of Friday’s close. Such clusters now seem to have become the norm in ETF and index concepts.

More and more analysts who have made it their business to study market breadth are switching to other portfolio concepts: Rebalancing is intended to enable an almost equal composition of the stocks contained in the ETF or the stocks in the index – and as continuously as possible, which in practice can of course only be achieved approximately and – let’s be honest – through higher costs and also additional effort.

In principle, however, such a rebalancing model makes sense because it can be used to map the most comprehensive condition of the overall market.

If you look at the ETF for the S&P 500 (SPY) today, you won’t see such an extreme cluster formation as in the IPO ETF: But the shares of Apple (AAPL) and Microsoft (MSFT) together represent just under 14% of the ETF, which accounts for just over a seventh of the performance in this ETF. 

Let’s compare the S&P 500 with the ETF concept, which tries to represent an equally weighted composition: In this corresponding ETF with the symbol RSP, the three most heavily weighted stocks are currently Rollins (ROL), Copart (CPRT) and Verisk Analytics (VRSK). These three stocks are weighted at 0.24% each in the index and together represent 0.72% of the ETF, which is only about 139th of the performance in this ETF. All three stocks are in rally mode, otherwise they would not have been able to take this “comparatively high weighting” at the close of the day last Friday. Equally weighted index concepts therefore take momentum into account, but not according to the motto “let profits run and limit losses”, but according to the motto “realize profits quickly and increase losing positions quickly”. It’s more a matter of speed than a matter of relative strength: if stocks go up as fast as Rollins, Copart, and Verisk Analytics that you can’t keep up with the rebalancing, then those stocks are weighted a bit higher than the other stocks at the next day’s open. 

Snowflake and AirBNB together should have led the IPO ETF to a negative performance over the past week: Snowflake gained 7.48% on a weekly basis, but AirBNB lost 12.27% on a weekly basis. The market breadth of stocks that have not been listed on Wall Street for too long thus showed relative strength to the two “leading ones” in the past trading week. This should actually be a sign of increasing risk-on activity in speculative stocks. Unfortunately for the bulls, the IPO ETF is currently quite isolated in terms of risk-on activity. Trouble for the bulls is now looming, especially from the US dollar:
The strengthening of the U.S. dollar creates a bear mood among gold and silver fans

In the past two columns, we had pointed out a possible early trend detection for a long entry in the US dollar against other currencies. We saw the signal in the UUP ETF, which was 99.95% invested in the June 2023 NYBOT FINEX United States Dollar Index Future (DXM23) at the close of the day on Friday.