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Thursday, March 25, 2021
Using Big Tech Share Basket as a Leading Indicator for SPX
*This performance is only observed with historical backtests and not traded by the company.
Risks & Assumptions
A Leading indicator is any variable /data of interest that can point towards the future trend direction of some other market index or an instrument. In some case, they can also confirm on the existing trend present in the markets. These are often used in trading strategies in order to ascertain or point towards a future trend. For instance, an investor can make use of existing M2 supply in the system along with some other macro economic data metric like bond yields to ascertain the future trend in the risk markets.
Similarly, one can also dissect the larger stock index into its heavy weight sector weights and ascertain the trend arising out of these sub components.
Role of Big Tech stocks in SPX index
On a cumulative basis, US based tech stocks (IT Sector) accounts for 27 % of the weight age in SPX index. Some of these big tech stocks are also classified under other industry groups. For instance Facebook although being a tech company is classified under the communication services sub sector owing to its business model. This represents the tremendous power of tech stocks in guiding the broader market direction.
The below line chart shows US Big Tech Share Basket super imposed on SPX 500 index (Last 1 year period). As seen from the chart, Big Tech share basket often leads the way for the broader market direction (Green Line – US Big Tech Share Basket | Red Line – US SPX 500 Index). We will look at 2 major past zones where big tech increasingly predicted the future SPX trend.
US CMC Big Tech Share Basket & US SPX 500 Index
(Source: CMC Platform | Legend - Red Line: SPX 500 Index & Green Line: US CMC Big Tech Share Basket)
Zone A – During last year’s market drop that occurred during the COVID – 19 infections surge, US Big Tech seemed to have leaded the losses before the major drop in SPX index price. In the period from 16th – 23rd March, Big Tech prices bottomed out. This was accompanied by SPX index touching its lowest level of 2184 during 23rd March period.
Zone B – Big Tech Share Basket bottomed out during last year’s late October – early November period. This was followed by rally in SPX index
Zone C – Prices are currently sitting in Zone C. Last month’s Tech sell of that occurred during mid – Feb period saw broader markets including SPX & US 30 indices correcting lower. While both the index prices are currently in divergence mode, any convergence of the same i.e. Big Tech Share Basket crossing near SPX price line on the upside could see more gains
Risks & Assumptions
Data Source: Bloomberg
Prices & Statistics as of: 25/03/2021
Arun Leslie John
Chief Market Analyst
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