StockCharts Insider: How to Use PerfCharts to Decode Investor Sentiment in One Minute or Less
There are countless tools and strategies for gauging market sentiment. When combined, sure, they give you a full picture. But they also take time.
But what if you just need a quick vibe check? You plan to dig deeper later, but right now, you need a fast read to keep you moving.
If this is the case, don’t overthink it. Just head to Interactive PerfCharts and load the Market Cap ETFs view on Histogram mode (you’ll find it under Predefined Groups in the top right menu). It’s one of the fastest ways to get a finger on the pulse of investor sentiment.
Insider Tip: Watch the Market Caps to Gauge Risk Sentiment
The trick here is to watch how the cap-weighted ETFs move relative to each other. It's also important to adjust the timeframe to track how sentiment shifts over time.
I’ll break all this down in the sections ahead. For now, let’s get acquainted with the ETF lineup so you’ll know what we’re dealing with.
The Players: ETF by Market Cap
How to Read Market Caps Like a Boss
Here’s the skinny:
- Mega-Caps in the lead? That’s money flowing into the biggest names on Wall Street. It can also signal a less risk-tolerant environment, as investors are seeking safer growth prospects. So, the market’s not entirely risk-off (as in investing in defensive stocks), but more risk-tempered.
- Small- and Micro-Caps in charge? That means investors are pouring their capital into smaller and less-established players. Translation: risk-on. These companies often have the highest growth potential, but also the highest levels of risk, simply because most are just starting out.
- If you’re seeing growth across different market caps, then your interpretation will have to be more nuanced, meaning you’ll have to dig deeper. It can mean that the market is transitioning, or perhaps undecided.
Remember, this is more art than science.
Sentiment in Action
These readings reflect real-time market data, so they can shift quickly, especially on shorter time frames.
1-Year View - OEF, SPY, and IWB are Leading
Over the past year, investors have been leaning hard on large- and mega-cap stocks. With small-caps underperforming, this tells us that Wall Street expects growth, but mostly among well-established companies. This, as you’ll see, will change over time.
6-Month View - A Weird Situation with 3 Interpretations
Large- and mega-caps are leading while small- and mid-caps are in the negative. But wait, something weird is going on. IWC, a micro-cap index—the smallest of the small—took a big leap.
How can you interpret this? Here’s where the “more art than science” thing comes to the fore. Here are three possibilities:
1 - Barbell Positioning: Investors are piling into opposite ends. They’re seeking growth in safe names but also making moonshot bets. I can imagine a single person doing both, but it’s also possible that investors are divided into either camp.
2 - Speculative Froth: Small-caps and mid-caps are clearly unloved. Could the micro-cap be rising due to meme stocks or other speculative, short-term bets? This isn’t truly risk-on, as the appetite for risk is narrow and not broad.
3 - Micro-Cap Rotation: Is micro-cap outperformance skewed by a handful of volatile movers? Or are micro-caps leading small-caps in a rotation toward a more risk-on environment?
3-Month View - Risk-On Rotation
If there was uncertainty in the 6-month view (there was plenty), the 3-month view answers it. Yes, the micro-caps led the charge to a more risk-tolerant environment. Now you can see mid-caps and small-caps rising in their relative performance, with micro-caps outperforming the large- and mega-cap indexes.
Over the last three months, the rally has broadened, with all market cap tiers participating. But will all tiers sustain their momentum?
Since the 1-month view looks too similar to the 3-month view, we’re going to skip it and jump to a one-week view.
1-Week View - What Just Happened?
The one-week view is most sensitive to real-time changes in the market. Micro-caps were outperforming all other market cap tiers, but the one-week chart shows it deeply in the negative. Micro-caps are the first to suffer when sentiment turns cautious. So, what just happened?
A number of things could have driven investors back toward safer bets:
- Earnings could have disappointed investors.
- Profit-taking could have driven down micro-caps.
- Economic reports and Fed announcements could have caused investors to be more cautious.
It all depends on the situation, which is why it’s best to keep up-to-date with the goings-on of the market and economy.
What You Should Do Next
When the market next opens, give this a try and run through each time frame. See if it helps inform your analysis. If it does, great—you’ve found a quick hack. If it doesn’t, there are other tools you can use, and I’ll cover those later.
And That’s a Wrap
Here’s my main Insider Tip: PerfCharts’ Market Cap ETFs view is like a market sentiment X-ray. It won’t predict the future, but it will tell you how traders have been placing their bets over time, and where they’re putting their money to work right now.
Pair the psychology with key technical levels, and you’ll get closer to developing an edge in your analysis.
