Meet the New High-Tech Dow Index: The Creatures of Confidence

Thu, Mar 25, 2021 - 12:53pm

What a difference a few years can make. In today’s ever increasingly technology dominated world, it seems that Moore’s Law continues to move life along at an ever increasing, exponential rate of pace. For those not familiar with Moore’s Law, it was an empirical observation made by Gordon Moore back in 1965 who posited a theory suggesting a doubling every two years in the number of components per integrated circuit. Mr. Moore was a technology icon, the Co-Founder of Fairchild Semiconductor, one of the leading early technology companies of the 1960s and 1970s. Mr. Moore was also a former CEO and Co-Founder of Intel Corp. Remarkably, some of the greatest growth businesses of today’s stock market did not even exist, five, seven or ten years ago. Names like Docusign, Twitter, Teladoc, Zillow, Shopify, OKTA, Z-Scaler, Facebook, Roku, Twilio, Alibaba, PayPal, and Square are all relative new comers to the stock market when viewed from a longer range point of view. Yet, the growth in many of these technology darlings, has been nothing short of breath-taking over the last few years. On cable TV, performance boards flash every day with the big technology leaders where acronym after acronym seems to come into play—FANG, FAANG, FAANGM, FAAMG, FAANTG—along with Jim Cramer’s latest “Magnificent Seven”: Tesla, PayPal, Square, Roku, Zoom, Peloton, and Netflix (TPSRZPN? Good luck pronouncing that one!).

All acronym fun aside, I thought that given the huge focus we all have on technology (and rightly so), it might be useful to ‘zero-in’ on a somewhat larger basket of today’s true technology leaders. To that end, I created a new, unweighted index composed of 30 high-flying tech stocks which I call “Creatures of Confidence – High Tech Dow”. The list of 30 stocks is as follows:

Note: The High-Tech Dow Creatures of Confidence is not an actual index and is being used for illustration purposes only.

The list attempts to be fairly encompassing and includes Fintech, Semiconductors, Telemedicine, Online Retailers, Search, Social Media, Real Estate, Cyber-Security, Telecom/Mobile Phone, Software and Database Systems.

Source: Frank Barbera, Financial Sense Wealth Management. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

The chart above compares three indices rebased to the absolute low of the Global Financial Crisis on 3/9/2009. The lower line is the performance of the Dow Jones Industrials, the middle line the performance of the NASDAQ Composite and the upper line the performance of the High-Tech Creatures of Confidence. In the chart, we find that the NASDAQ Composite has done a bit better than twice as well as the DJIA, and that High Tech Creatures of Confidence have actually done 14X the Dow performance and 7X the performance of the NASDAQ Composite.

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Now obviously, it is very unlikely that anyone would have had the near perfect vision to have invested in this basket of 30 stocks back in 2009. That is not our point. The point is that these stocks have risen a tremendous amount and are now a very key segment in determining where the major market averages will go next. On a market cap basis, the 30 stock High Tech Creatures of Confidence Index now totals a value of $12.081 Trillion, or about half the size of the U.S. economy. With more than half the names on the list not even traded a dozen years, the growth has been remarkable! As of this writing, the Dow Jones Industrial Average – all 30 names – are worth about $9.85 Trillion and most of the companies in the DJIA have been publicly traded 30 years or more.

When I looked at the completed long-term chart of this Glamour Technology Index, one thing that really struck me was the rapid upside acceleration in these stocks over the last 12 months, during the pandemic. In mid-June of last year, the index powered up and through a long standing trendline which seems to form the upper end of a long-term rising trend channel. This is a phenomenon often seen in the latter phases of a climactic run and going forward it will be important for this basket to remain above that line.

Source: Frank Barbera, Financial Sense Wealth Management. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

Taking a look at this very volatile index, we note that it recently made a peak on 2/16/21 at a reading of $416.52 and then fell 22.08% over 14 days into a low of $324.52 on 3/08/21. That may sound like a “big” decline but remember this is a Tech Index among Tech Indices, and from its lows of March 18, 2020 (115.22) into the high on 2/15/21 (415.52), the Creatures of Confidence High Tech Dow was up a blazing +260.63%, so -20% is chump change on a gauge like this. Over the last few weeks, after a small rally back to $365.23 on 3/16, the index is now weakening once again and closing lower on Wednesday (by -3.01% ) to end Wednesday (March 24) at a reading of $342.03. At this point, I am watching a few areas for critical support. The first is the area of the 9/2/20 and 10/13/20 highs (306.83 and 309.44) respectively. For the NASDAQ Composite (close 3/24/21 12961.89 -265.61 or 2.01%), the equivalent highs are 12074 (9/2/20) and 11946 (10/13/20), while for the widely traded QQQ ETF (last: 312.01 3/24/21 -5.21 or 1.64%), the equivalent highs are 303.50 (9/2/20) and 297.05 (10/13/20). If the Creatures of Confidence and the other indices break below those highs, which should now be acting as important SUPPORT, that would be a potential caution signal for the stock market in my view.

Source: Frank Barbera, Financial Sense Wealth Management. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

Dovetailing along the former highs of 9/2/20 and 10/13/20 as support is also the 1-year moving average for the index which closed Wednesday March 24 at a reading of 317.59, again, with the index at 342.03. That’s about 7% below current levels on the High Tech Creatures of Confidence Index. For the NASDAQ Composite, the equivalent 252 day (1-year) moving average closed 3/24/21 at 11207.39, while for the QQQ, the one-year average ended 3/24/21 at 274.35. Another important support level which also dovetails with the two important highs mentioned earlier, (the 9/2/20 and 10/13/20 peaks) is the .382 Fibonacci retracement of the entire advance from the March lows of 2020 to the February peak of 2021, that comes in at virtually the same level which is 302.50 on the index. At Wednesday’s close, all three technology measures, the NASDAQ Comp, the QQQ ETF and the Creatures of Confidence High Tech Dow closed below an important, (shorter) blended moving average. This type of downside reversal day and close below the moving average usually implies that a correction has further to go, and right now it appears as though large cap tech is essentially in retracement mode.

high tech dow fibonacci
Source: Frank Barbera, Financial Sense Wealth Management. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.
high tech dow moving average
Source: Frank Barbera, Financial Sense Wealth Management. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

Above: Linear Scale with arrow highlighting the 1 year moving average.

As we go forward, my real focus will remain on these key ‘favored’ market darlings, and I will be watching closely to see if they can hold the 9/2/20 and 10/13/20 highs and, if not, whether they are able to hold above the key one-year moving average. It has been a huge and extended advance for many of these names and even within the context of an ongoing bull market, corrections and pullbacks are a normal part of the equation. Hopefully, this article has highlighted some of the key names and key levels to watch as we move forward from here.

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Copyright © 2021 Frank Barbera

About the Author

Senior Portfolio Manager
frank [dot] barbera [at] financialsense [dot] com ()
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