Big stocks’ strength hides narrow market rally
Market capitalisation of mega-cap tech stocks as much as bottom 359 stocks in S&P 500
Nasdaq was 16 per cent above its 200-day average last week after eight consecutive daily gains. Photograph: Sharron Stapleton/Reuters
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.
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.”