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.