The Myth Of Narrow Leadership

Includes: AAPL, LSI-OLD, SPY
by: Alan Brochstein, CFA

The Bull Market that began almost three years ago is alive and kicking. Tested twice and sitting near its highs from last year, the rally has been greeted with a lot of skepticism. Most recently, the talk has been focused on the narrow leadership, with a lot of attention paid to the stellar performance of Apple (NASDAQ:AAPL). Now that the stock has suffered a nasty reversal on heavy volume, surely the market will collapse without its leader, right?

Well, the data disagree. While it is true that AAPL has been a big contributor given its large gain and its massive market cap, the breadth of the rally has been quite impressive. As of 2/15, more stocks in the S&P 500 (NYSEARCA:SPY) were ahead of the market than not, with 268 stocks (52%) returning more than 6.8%. While it's true that there are some impressive performances among the largest companies, on average its the smaller companies that are doing better.

While everyone is focused on AAPL's great run, it is not even in the Top 10 for the sector. Who's winning? LSI-OLD, with 15 other Technology companies in front of AAPL. And while it's true that Technology, which is the largest, has been the best sector, here again, there is breadth. As of 2/15, Financials, the second largest sector, were just behind Technology, and Consumer Discretionary and Industrials, the fifth and sixth largest, are also ahead of the S&P 500. So, four of the 10 sectors are beating the market. When you add up the market cap of these four sectors, it totals 54%, suggesting that the leadership is quite balanced.

This year has started off very differently from 2011, a year that stocks seemed to correlate perfectly with one another. In contrast, we have a sharp divergence in returns among the sectors, with two sectors (Utilities and Telecom Services) actually down.

Finally, let's take a look at the individual sectors. Here are the percentage of stocks in the sector that are beating the market:

  • Consumer Discretionary: 56%
  • Consumer Staples: 19%
  • Energy: 58%
  • Financials: 62%
  • Health: 56%
  • Industrials: 59%
  • Materials: 67%
  • Technology: 75%
  • Telecom Services: 14%
  • Utilities: 3%

Here is where we really see how broad the leadership is: seven of 10 sectors have more winners than losers! Remember, only four of the 10 are beating the market, so even lagging sectors are filled with winners. No, what's narrow is not the leadership, but rather the losers. Thirty-two of 33 Utilities are lagging the market. Consumer Staples has 34 of its 42 members lagging.

So, not to worry. This is not a one-stock stock market!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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