Thursday, April 16, 2009

Watching Growth Themes in the Stock Market

During the stock market's recent rally, we've seen investor and trader interest turn from deflation and recession to inflation and growth. That has implications for commodity and currency prices, as well as equities.

Two ways of monitoring the growth theme include the relative performance of NASDAQ 100 stocks to S&P 500 large cap issues (growth and technology vs. overall market) and emerging market stocks vs. S&P 500 U.S. issues (growing, young economies vs. mature economy).

During the rally, NASDAQ stocks have outperformed S&P 500 shares handily. As noted in yesterday's Twitter post, 32% of NASDAQ 100 shares were trading above their 200-day moving averages, compared to 16% for S&P 500 stocks. We can also see from the bottom chart, that emerging market shares (EEM, pink line) have handily outperformed S&P 500 stocks.

In recent trade, the S&P 500 stocks (ES futures; top chart) have been rangebound, while NASDAQ 100 shares (NQ futures; middle chart) have pulled back further from their highs. If the growth theme is to continue, we should see new highs out of this consolidation, with sustained strength in emerging market shares. Failure of the growth leaders (NQ, EEM) to participate in attempts at new highs would suggest the start of a rotation that could precede a more significant price correction.

Understanding market themes can be useful for both swing and daytraders. I will be tracking these growth themes in future tweets (free subscription).