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While students at most colleges and universities are busy prepping for upcoming finals, the ETF that tracks emerging markets is getting ready for its own big test of a key moving average.  In the immediate aftermath of the election, emerging market equities were one of the biggest losers, swiftly falling over 9%.  However, after more or less holding support at the 200-DMA the iShares Emerging Markets ETF (EEM) has rallied back close to 7%.  At yesterday’s close, though, the ETF finished the day right below its downward sloping 50-day moving average.  Whether or not it can pass this test will be a key driver of sentiment for the sector in the coming weeks.  There are countless examples in the annals of chart history where stocks or indices have shown this pattern only to stall out right about here and go on to make lower lows.  Therefore, if EEM can take out its 50-DMA, it will set the stage for a strong close to the year.

One fact that could be working in the sector’s favor is a recent report from Standard and Poor’s, which stated that:

“We believe it may no longer be possible to separate advanced economies from emerging markets by describing their political systems as displaying superior levels of stability, effectiveness, and predictability of policy making and political institutions”

The above was the same line of reasoning we believed justified higher valuations for US assets in the aftermath of the Brexit vote and is a view we continue to hold following political instability in Europe.  Additionally, while the comments from S&P seem to suggest that advanced economies should no longer warrant higher valuations relative to emerging markets, that narrowing would likely come as a result of valuations meeting somewhere in the middle (higher valuations in emerging markets and/or lower valuations in advanced economies).

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US stocks have had quite a rally in the last month, but in the large cap space the clear leader has been the Dow Jones Industrial Average (DJIA).  While much of the strength in the DJIA has been chalked up to the index being full of old-line industrial stocks that stand to benefit from a Trump victory, practically all of the outperformance can be summed up in two words – Goldman Sachs (GS).

Because the DJIA is price weighted, stocks in the index with the highest share prices have the highest weighting, while stocks with the lowest share prices have the lowest weighting.  Yes, this is a ridiculous method of weighting an index, but the DJIA has withstood the test of time, so who are we to argue.  Plus, it’s not like we haven’t seen other methods of weighting over the years that weren’t just as peculiar.

The table below lists each of the DJIA’s current components sorted by their current weighting in the index along with their performance since Election Day and how many points each stock has contributed to the DJIA’s overall gain since Election Day.  At the top of the list is GS, which has an 8.4% weighting in the index.  Not only is Goldman the most heavily weighted stock in the Dow, but it is also far and away the best performing stock in the index since Election Day.  In fact, of the 1,282 points that the DJIA has added in the last month, Goldman accounts for 408 of those points, or 32% of the gain.  The next biggest contributor since election day — UnitedHealth (UNH) — has only added 112 Dow points.  Without Goldman, instead of being up 7% since Election Day, the DJIA would be up less than 5%.

Looking at the current weightings of the index, the DJIA is looking increasingly top heavy.  Not only does Goldman by itself account for over 8% of the index, but the top five stocks in the index account for a staggering 31% of the index.  At the other end of the spectrum, major US stocks which are among the largest in terms of market cap have weightings of less than 2%.  Take General Electric (GE), for example.  While it is one of the ten largest US companies in market value, its weighting in the Dow is barely 1%.  Put another way, the stock could go to zero and it would have less of an impact on the Dow than a 15% drop in Goldman.

Like Goldman, which is both the most heavily weighted stock in the DJIA and the top performer, a little bit of a trend has developed where the higher priced stocks in the index have been among the index’s best performers while the lower priced stocks have underperformed. Of the six stocks in the index that have traded lower since the Election, five are in the bottom half of the index in terms of share price (and therefore weighting).  So what are the ramifications of all this?  While there’s a good chance that there’s nothing to worry about regarding the index’s top heavy-ness, it has created a situation where a lot of the DJIA’s ‘eggs’ are in a limited number of baskets.  The only way to alleviate this situation would be through a combination massive underperformance of the index’s high priced stocks along with major outperformance of the index’s low priced stocks, or through stock splits.  In the case of those top five stocks which currently account for at least 5% of the index by themselves and nearly a third of the entire DJIA combined, if each of them issued a 2-1 split, their combined weighting would fall to 18.6%.  Furthermore, none of the five would have a weighting in the index above 5%, while the most heavily weighted stock in the index would be Home Depot (HD) at 5.5%.

We’re happy to announce that episode 3 of Bespokecast is now available to the general public via the various podcast platforms.  Be sure to subscribe to Bespokecast on your preferred podcast app of choice to gain access to new episodes.  We’d also love for you to provide a review as well!

In our newest conversation on Bespokecast, we speak with BTIG’s Chief Technical Strategist Katie Stockton.  Katie is one of the top technicians around, and this is a wide-ranging discussion on technicals as an investment strategy that is both educational and instructive.  Katie has a long career in markets and has been immersed in the discipline of technical analysis right from the beginning.  In our hour-long conversation, we get her basic approach to technicals, background about the goals and toolkits that technicians use, and her current view of market technicals.  We also discuss non-market topics, including the work-life balance for finance professionals with families.  We had a fantastic time recording this conversation, and we hope you enjoy it!

Each new episode of our podcast will feature a special guest to talk markets with, and Bespoke subscribers receive access one week before it’s made available to the general public.  If you’d like to try out a Bespoke subscription in order to gain access to these podcasts a week in advance, you can start a two-week free trial to check out our product.  To listen to episode 3 or subscribe to the podcast via iTunes, GooglePlay, OvercastFM, or Stitcher, please click below.

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Each month, Bespoke runs a survey of 1,500 US consumers balanced to census.  In the survey, we cover everything you can think of regarding the economy, personal finances, and consumer spending habits.  We’ve now been running the monthly survey for more than two years, so we have historical trend data that is extremely valuable, and it only gets more valuable as time passes.  All of this data gets packaged into our monthly Bespoke Consumer Pulse Report, which is included as part of our Pulse subscription package that is available for either $39/month or $365/year.  We highly recommend trying out the service, as it includes access to model portfolios and additional consumer reports as well.  If you’re not yet a Pulse member, click here to start a 30-day free trial now!  Below we highlight the results of questions we ask regarding discretionary spending and inflation expectations.  These are two of literally hundreds of data points included in each monthly report.

Our monthly tracker for expected discretionary spending over the next few months broke out in November to its highest levels in the history of our survey.  Obviously, seasonal strength is a major contributor as holiday spending drives a huge portion of total US consumer spend, but this result also suggests that the Black Friday to December holiday shopping period is trending towards exceptionally strong levels.  As the Atlanta Fed’s GDPNow tracker of Q4 growth is expecting total growth of +3.6%, if this holiday season proves to be as strong as our tracker seems to indicate, then that number could be setting up for a 4-handle GDP in Q4 2016.

Piggybacking off consumer expectations, one interesting development in the data this month was that we saw a steep drop-off in inflation expectations (lower chart).  The average expected price increase over the next one, five, and ten years all fell sharply for a typically stable tracker from month to month.  There doesn’t seem to be a good explanation for this decline, but given the prior trend of accelerating price pressures (which have also been visible in market pricing of inflation, realized CPI and PCE inflation, commodity prices, and other indicators) the sharp shift was eye-catching.

Want to see more of our proprietary survey analysis, including data for individual consumer technology stocks?  If you’re not yet a Pulse member, click here to start a 30-day free trial and view our full November Pulse report.