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Eventually The Weight Becomes Too Much To Bear

Tyler Durden's picture




 

Via Dana Lyons' Tumblr,

The “equal-weight” S&P 500 has dropped to near 3-year lows versus the cap-weighted version. Previous such events under similar conditions occurred at inauspicious times.

Continuing with the impromptu weekly theme regarding the relatively “thin” nature of the recent stock rally, today we take a look inside the S&P 500. Like yesterday’s post on the consumer discretionary sector, this one examines the “equal-weight version of the index versus the traditional cap-weighted version. Whereas the performance of the cap-weighted index can be subject to undue influence by the very largest components, a look at the equal-weight version can give us an idea of the health of the broad swathe of stocks within the index.

While the relative under-performance on the part of the equal-weight S&P 500 (as judged by the Rydex Equal-Weight S&P 500 ETF, RSP) may not be as egregious as in the consumer discretionary sector, it is still somewhat alarming. Despite the cap-weighted S&P 500 (as judged by the S&P 500 SPDR ETF, SPY) being reasonably close to its all-time highs again, the equal-weight:cap-weight ratio has dropped to near 3-year lows. Considering the context, the RSP:SPY ratio is at levels only seen just prior to substantial declines in July and back in 2007.

 

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By “considering the context”, we mean that the cap-weighted S&P 500 is less than 3% from its all-time high. The only months, historically, that have seen the equal-weight:cap-weight (RSP:SPY) ratio at a 2-year low under those circumstances are shown below. Obviously, these did not mark the best months to be buying stocks.

  •  September-November 2007
  • July 2015
  • October 2015

Again, like we have mentioned throughout the week, this situation means that the inordinate bulk of the lifting during the recent rally is being done by the biggest of stocks. It does not necessarily mean that the rest of the stocks are falling or doing poorly. It just means that they’re not doing their fair share. As it turns out, on an equal-weighted basis, the indices have basically been drifting sideways during the most recent few weeks while the biggest stocks have been rallying smartly.

So is this a big deal? Well, in July it was. And in the fall of 2007 it was. Does this mean the market is on the verge of another collapse? Not necessarily. It doesn’t even mean that the rally cannot continue, for a time. It does mean that if one wants to participate on the long side, they are likely better suited being in those relatively few stocks or areas that are carrying the market at the moment.

That said, we are big proponents of good breadth as a sign of a healthy market. The more stocks that are participating in a rally, the better the foundation for the rally. Thus, when some, or a lot, of stocks invariably fall by the wayside, there are enough strong stocks to continue to carry the burden. When there are relatively few stocks doing all the heavy lifting, there is less margin for error.

Eventually, the weight will become too much to bear for just those few stocks. And, as we saw this summer, when those relatively few leaders begin to stumble, the market will again be vulnerable to significant damage.

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More from Dana Lyons, JLFMI and My401kPro.

 

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Thu, 10/29/2015 - 13:21 | 6726800 Pairadimes
Pairadimes's picture

Divergence in this metric is not your friend.

Thu, 10/29/2015 - 13:33 | 6726837 Hype Alert
Hype Alert's picture

Need to get past the window dressing for mutual fund's year end.  November is much closer to the December liftoff scare than October.

Thu, 10/29/2015 - 13:41 | 6726858 Stainless Steel Rat
Stainless Steel Rat's picture

*shrug*

Thu, 10/29/2015 - 13:21 | 6726802 So Close
So Close's picture

bend.. bend... bend..  SNAP!

Thu, 10/29/2015 - 13:26 | 6726812 buzzsaw99
buzzsaw99's picture

Brawndo the Thirst Mutilator had come to replace water virtually everywhere. Water, the basic component of all life was deemed a threat to Brawndo's profit margin. The solution came during the budget crisis of 2330 when the Brawdo Corporation simply bought the FDA, and the FCC, enabling them to say do and sell anything they wanted.

 

Thu, 10/29/2015 - 14:01 | 6726923 centerline
centerline's picture

It's got electrolytes!

Thu, 10/29/2015 - 14:46 | 6727090 Normalcy Bias
Thu, 10/29/2015 - 13:27 | 6726822 seek
seek's picture

Speaking of weight, today's gold chart is the most time-linear downtrend I've seen in a long time. Looks like someone big is selling, and surprisingly, actually trying to get the most money possible from the sale rather than just dropping it all in one lump...

Thu, 10/29/2015 - 13:43 | 6726863 Bastiat
Bastiat's picture

Yeah . . . after yesterday's bombing in the futures, right on cue. 

Now the fed will raise rates, behave responsibly and completly re-establish confidence in the USD, so of course gold should go down.  Just to be sure though we'll roto-till MENA and flood Europe with refuges to undermine the euro.

Thu, 10/29/2015 - 15:05 | 6727187 seek
seek's picture

If the Fed really does raise rates in December, that could be one of the last big buying opportunities before all this shit really goes down in 2017-2018.

Increasingly, though, I'm convinced that there will be less and less uncontrolled money (e.g. something investors control rather than TBTF banks under the direction of the CBs) around, and that all assets will be in a deflationary spiral, so gold may very well continue to go down to prices not seen since the early 2000's before whatever breaks, breaks and we get a new system.

I quite literally have no idea where to stuff money safely these days. Given that we've got negative rates on government bonds, neither does anyone else, apparently.

Thu, 10/29/2015 - 15:52 | 6727366 Wow72
Wow72's picture

The powers that be dont want you to save they want you to spend every last dime.  I am hoarding cash and buying a little gold/silver here and there because there isnt a ton left and I dont want to be left out when the real buying starts.  Price will travel quickly up through current levels.   Im buying all the way down, I cant stand the FED and this current market, I dont want any  of their paper and broken promises any more.  I believe there is a psychological war going on between gold-bugs and fiat supporters a battle for peoples minds.  Gold will win that argument easily.  My advice is take as much cash out of the banks as you can.  They hate that idea, so it must be good for u.  In other words do everything they are trying to deter you from doing, buy gold, hoard cash.  They dont like that so it has to be good for u and bad for them.

Thu, 10/29/2015 - 14:51 | 6727138 Nobody For President
Nobody For President's picture

Seek, silver looks similar...

http://finviz.com/futures_charts.ashx?t=SI&p=m5

Thu, 10/29/2015 - 15:03 | 6727182 herkomilchen
herkomilchen's picture

Maybe Venezuela.

Thu, 10/29/2015 - 13:33 | 6726838 Johnny Horscaulk
Johnny Horscaulk's picture

Post hoc ergo propter bear?

People will get out of shit stocks of shit companies [facebook, gopro] and get into stocks that are reliable [ibm, apple, boeing]

No one is going to go broke investing in guns, germs and steel.

Thu, 10/29/2015 - 14:00 | 6726919 Good bi bull
Good bi bull's picture

All in then

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