Earnings information from massive cap Nasdaq shares like Microsoft (MSFT) and Meta (FB, was once Fb) have been pushing up the capitalization-weighted indices, in addition to the share worth of QQQ, the ETF which tracks the Nasdaq 100 Index. In these cap-weighted indices, the behaviors of the big-cap shares matter an entire lot extra towards the calculation of the index worth. However the behaviors of the opposite parts can inform us extra concerning the well being of the liquidity out there to carry all shares.

The ETF QQEW owns the identical shares as QQQ, however weights all of them equally, versus by complete capitalization. More often than not, QQEW does the identical issues that QQQ does, which is what you’ll count on. However typically they disagree, and, when that occurs, the message from QQEW often finally ends up being proper about the place each ETFs are headed.

That is related proper now as a result of, in early 2023, QQEW has proven us a bearish divergence, making a cheaper price high though QQQ has made the next worth high. QQEW has additionally damaged its rising bottoms line, then pulled again as much as check the underside of it. QQQ, by comparability, is crusing alongside fortunately above its equal uptrend line, blissfully blind to troubles among the many lesser parts.

Inside this week’s chart, I’ve highlighted a few different notable divergences between QQEW and QQQ. If the chart had been to indicate knowledge additional again in time (which might contain cramming in additional knowledge, making it tough to see), we may discover much more of those divergences.

The rationale why comparisons like this one, or comparisons between a serious index and an Advance-Decline Line, will be helpful is that the massive cap shares won’t detect liquidity issues in addition to the lesser points. I liken this to the way in which {that a} wholesome sow can nurse an entire litter of piglets rather well.

But when she is a poor milk producer, the largest piglets could possibly muscle their means in to get the milk they want, whereas the runts will go hungry. Ultimately that poor milk manufacturing can have an effect on the massive piggies, however watching the well being of the runts goes to offer a greater message about milk manufacturing.

So it goes with the inventory market. The large-cap tech shares are the massive piggies, capable of muscle their means in to get consumers throughout a situation of poor liquidity. However the runts of the inventory market will endure first, and this exhibits up as weaker efficiency for issues like small cap shares, and excessive yield bonds. It additionally exhibits up as differential efficiency among the many part shares of an index just like the Nasdaq 100. The message of the present divergence is that liquidity is poor, which is a message that the habits of Microsoft and Meta won’t convey till a lot later.