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3 Charts I'm Watching This Week

Social media stocks are in trouble, but value is staging a comeback.

The S&P 500 continues to push to new all-time highs, but there are pockets of outperformers and underperformers. The bulls still tend to be in control here, but there are a couple of trends I'm watching that suggest some potential weaknesses ahead in the tech and mega-cap space.

Social Media Stocks Struggle

There are a number of reasons to be worried about social media stocks or the broader communication services sector altogether.

Snap's earnings report last week offered a potentially dire warning for other companies, such as Facebook, Twitter and Alphabet, that rely heavily on internet advertising for their revenues. The company said that supply chain disruptions and labor shortages are resulting in an environment where companies are becoming more hesitant to spend on advertising. On top of that, changes to Apple's operating system also had a negative impact on the company's revenue generation. All in all, Snap is down 30% in just the past few trading days.

The impact is also showing up in the Global X Social Media ETF (SOCL), where Snap is the 3rd largest holding at just under 8% of total assets.

price-socl

Social media stocks in general have been in a downtrend throughout 2021 and it may very well continue. Facebook and Alphabet deliver their Q3 earnings reports this week and it'll be very interesting to hear if they mirror the warning that Snap just issued. Facebook and Alphabet, of course, are on a different scale than Snap and they have more diverse revenue sources, but ad revenue challenges could pull down those stocks several percent more.

How about Pinterest? You may not think of this as a social media stock, but it is the #13 holding in SOCL. Pinterest looked great when it seemed that PayPal might be looking to buy it, but today it appears to be off the table. The stock is down 20% since last week and more than 40% off of its one-year high.

There's not much sentiment to be had in this group.

Small-Caps, Mid-Caps, Value Outperforming

If you're looking for bullish signals for the market, the performance of the non-large-cap growth areas of equities could be it.

Screen Shot 2021-10-25 at 9.25.01 AM

In this chart, being in the upper right quadrant is better. The blue circle is the S&P 500 performance over the past 1-month and 3-month periods.

The only segment of the market we see underperforming the S&P 500 is large-cap growth. Small-cap growth is underperforming over the past month, but it is leading over the past three months. All other segments - small-caps, mid-caps and value stocks are leading here.

While the markets are still concerned about inflation, supply chain issues and a decelerating growth environment, the cyclical trade is still hanging tough. Energy, banks and industrials are having a nice run. Small-caps are outperforming large-caps, which is what you like to see. The value trade is the one that has struggled to keep up, but even this one is having a moment right now.

Defensives are trying to build a little momentum here and we could see a shift in sentiment, but this is a bullish chart for now.

Investors Still Abandoning ARK ETFs

OK, this isn't a chart, but it tells a story nonetheless.

The ARK ETFs have become polarizing in 2021. The strong outperformance is gone as the disruptive innovation theme has fallen somewhat out of favor. Part of the reason that Cathie Wood has turned into a villain for some is that a lot of the flows came in at the market peak. The majority of the assets in the ARK ETFs today could be underwater.

Over the past month, the shareholder exodus from ARK has continued.

Screen Shot 2021-10-25 at 9.38.17 AM

The top 4 biggest outflows among thematic ETFs belong to ARK (and the ARK Innovation ETF (ARKK) is also there in the bottom 10). ARK is still a top 15 ETF issuer, so a $1 billion outflow over the past month won't necessarily put the company out of business, but it's a clear sign that the ARK name isn't as trendy as it once was.

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