And then there were four.
More worry signs of narrowing market leadership.
Investors should prepare for a re-convergence of laggards and leaders.
And Then There Were Four
The narrowing of the U.S. equity rally has become extraordinary. While many technicians worry about "market breadth", or the number of stocks participating in a rally, this time around there seems to be less concern. This seems curious to us, as market leadership has been embodied by only four stocks. Year-to-date, the S&P 500 is up a bit less than 5%. A whopping 67% of this gain in the index is from Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), and Google (NASDAQ:GOOG) (NASDAQ:GOOGL). The new year has brought a new acronym to the markets: MAGA. Or the trillion-dollar club. The four big tech stocks have all seen their prices appreciate to the point of becoming trillion-dollar market cap companies. Trump is very proud of this, but even presidents can show signs of complacency.
When four stocks make an entire stock market look strong, this becomes a worry for us. We now have evidence that this extremely narrow market leadership is showing cracks in the foundation of the equity rally. First, the S&P 500 Advance/Decline Volume line is no longer keeping up with the rise in the S&P 500 price index. We have too many S&P 500 companies falling, even if the Big Four keep pulling the market cap-weighted price index higher.
Next, looking at all 500 S&P companies on an equal-weight basis, the rally in U.S. large cap stocks is still impressive since last October. However, even more impressive is the divergence between the S&P 500 market weight and equal weight indexes. We see this divergence as a temporary anomaly rather than a permanent phenomenon within the S&P 500.
Finally, if we isolate the Big Four and create an equal-weight index of these four stocks, and compare this index versus the S&P 500 ex-Big Four, the S&P 496, we fully understand the amplitude of this market anomaly. Whether readers have a bullish outlook on equities or a bearish outlook, everyone must recognize the extreme phase of exaggeration occurring with the U.S. equity market.
To be sure, the Big Four tech index and the S&P 496 will eventually re-converge, even if this re-convergence occurs over a long-term horizon. Bullish or bearish, each investor is well-advised to prepare his/her portfolio for the re-convergence of the Big Four tech stock and the S&P 496.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.