Market Dynamics in 2023: The Importance of Selecting the Right Assets

The year 2023 is shaping up to be a crucial period for asset selection. However, this goes beyond choosing assets from different asset classes. The market breadth, also known as market amplitude, is playing a significant role in determining which assets perform well. Examining the market breadth allows us to understand the disparities between the overall index performance and the performance of individual components within the index.

Analyzing Market Discrepancies

By looking at the behavior of the S&P 500 index, for example, we observe a substantial difference between the index’s overall performance and its equally weighted performance. Until May 21st, the S&P 500 had risen by 5.37% since the onset of the banking crisis. However, when considering the equally weighted performance, the index had actually declined by 2.15%. This discrepancy becomes even more pronounced when we examine the trend since August 3rd, 2023, the fateful moment when the banking crisis began. During this period, while the overall index soared, the equally weighted index dropped by more than 2%. These disparities are not new; we have experienced similar situations in 1999, November 2008, and May 2020.

Leading Companies and Market Amplitude

The trend in the market is being driven by a handful of companies, such as Apple, Amazon, Netflix, Google, Microsoft, Nvidia, and Tesla. These companies have been the primary drivers of the S&P 500’s performance this year. When only eight companies account for 100% of the index’s gains, it indicates a weak market breadth. The exceptional performance of these companies can be attributed to their relatively low starting prices following a severe correction in 2022. Additionally, the focus on artificial intelligence and its potential in the future is driving investor interest in these companies. The ones that adapt to this new technology will likely lead the markets and achieve significantly higher productivity levels than their counterparts.

Challenges in the Banking Sector

While technology companies thrive, the banking sector continues to face challenges. The problem stemming from the banking crisis remains unresolved, with smaller banks experiencing more significant difficulties. The vulnerability of the banking sector appears to be closely tied to size, with smaller banks being hit the hardest. Larger banks, such as JP Morgan, have managed to weather the storm better, while smaller regional banks and those in smaller indices have experienced substantial declines.

The root cause of this underperformance is related to deposit outflows. Customers are increasingly realizing that they can obtain better returns on their money by investing in alternative products such as money market funds or short-term debt instruments. This shift in customer behavior has led to a significant outflow of deposits from traditional banks. If banks have not properly measured their capital ratios, this deposit outflow may force them to sell part of their fixed income portfolios, resulting in losses.

Balancing Positive and Negative Factors

When faced with both positive and negative structural factors, it is essential to take a balanced approach. Rather than being solely bullish or bearish, analyzing relative charts can provide valuable insights. For instance, comparing the long-term performance of the Nasdaq 100, which represents the technology sector, to the Russell 2000, which comprises small-cap companies with a significant banking component, reveals an ongoing trend favoring the Nasdaq 100. A symmetrical triangle pattern has emerged, suggesting a continuation of the trend, potentially resulting in a 36% long-term increase in favor of the Nasdaq 100 over the Russell 2000.

Conclusion

In the complex market environment of 2023, it is crucial to consider both positive and negative structural factors.