Big stocks’ strength hides narrow market rally

Stocks have done very well over the last few months but not everyone is flying high. Rather, the big stocks have done the heavy lifting, resulting in a narrow rally.

Just look at the Nasdaq, which was 16 per cent above its 200-day average last week after eight consecutive daily gains. Despite that elevated reading, less than 60 per cent of its members were above their 200-day average, according to SentimenTrader's Jason Goepfert.

The S&P 500 was also comfortably above its 200-day average, he notes, although less than half its members are above the same measure.

“This is a theme across industries, sectors, and world indexes,” says Goepfert, who says there has not been such a narrow rally since 2000.

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One obvious explanation is mega-cap tech stocks continue to outperform. The market capitalisation of the big five – Microsoft, Apple, Amazon, Google and Facebook – last week crossed $6 trillion (€5.35 trillion) for the first time, notes Ritholtz Wealth Management's Michael Batnick, as much as bottom 359 stocks in the S&P 500.

They now account for 22 per cent of the S&P 500, up from 10 per cent only five years ago.

When will this outperformance end?

Who knows – the technology sector has been technically overbought on more than 50 per cent of trading days since mid-March, according to Bespoke Investment, proving overbought stocks can become more overbought.

Still, a narrow rally is a warning sign. According to Goepfert, strong index gains in periods where relatively few stocks are advancing “have a strong tendency to resolve lower in the weeks-to-months ahead.”