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Lack Of Participation Could Become Weighty Issue For Stock Rally
Participation among all stocks in the recent stock rally, as measured by an equal-weight index, has been relatively weak – as it has been since last spring.
In several posts last week, we looked at the developing weakness among “equal-weight” indexes versus their comparable cap-weighted versions. As the name implies, an equal-weight index applies an equal weighting to all of the components in the index, regardless of price or market cap. Taking this more democratic view of the index makes it easier to assess how strong the broader group of stocks really is, as opposed to a weighted index which may be supported by a relatively small number of its biggest constituents. This weakening among the equal-weight indexes showed marked acceleration over the past few weeks. But is it possible that the cap-weighted indexes were merely catching up to their equal-weight counterparts?
We offer as evidence of this variant view, the performance of the Equal-Weight Russell 1000 Large-Cap Index versus the traditional, cap-weighted Russell 1000 as the market was emerging from its late September lows. As this chart shows, in the initial rally off the lows, the Equal-Weight Russell 1000 handily beat its cap-weighted counterpart, as well as both the Russell 1000 Growth and Russell 1000 Value. This demonstrates that it was not just the style of stocks accounting for the leadership, it was the breadth of stocks. The equal weighting of the smaller components in the index allowed for the out-performance of the cap-weighted Russell 1000 Index.
On October 9, following the first 2 weeks of the bounce, the Equal-Weight Russell 1000 was between 1% and 2% ahead of each of the other indexes. At that point the other indexes certainly had some “catching up” to do.
From October 9 to October 21, that’s exactly what the other indexes did. During that period, the Equal-Weight Russell 1000 drifted slightly lower as the others drifted slightly higher. As of October 21, each of the indexes’ bounce gains were within 0.2% of +7%. Thus, the other indexes had caught up to the Equal-Weight. At that point, a reasonable argument could have been made for the “catch-up” hypothesis. In other words, the under-performance of the Equal-Weight Index was simple mean-reversion versus its initial out-performance.
However, the continued relative under-performance since October 21 undercuts that argument. Since the other Russell 1000 Indexes caught up to the Equal-Weight Index, they have continued to drift higher. Meanwhile, the Equal-Weight Russell 1000 has continued to drift sideways. As of Friday, October 30, about 1 month following the September market low, the other Russell 1000 Indexes had garnered a bounce advantage of between 1% and 2%. The tables have been turned.
Zooming out a bit, we find probably a more compelling case against the “catch-up” argument. See, this under-performance by various equal-weight indexes (i.e., the broad market) goes back further than a few weeks. As we touched on in last week’s posts, among the consumer discretionary and energy sectors, the ratio between the equal-weight and cap-weight indexes has fallen to 2009 levels. And even among the S&P 500 stocks, the equal-weight index is at relative 3-year lows versus the cap-weighted index. This is not just a recent phenomenon.
We can see this in the Russell 1000 Equal-Weight Index as well. Looking back to the Index’s top in May (which was the top in many other indexes as well), it has clearly been under-performing its cap-weighted peers for 5 months now.
Thus, the under-performance of the Equal-weight Russell 1000 is not just a phenomenon of the post-September rally. It has been underway for many months now. Therefore, the out-performance by cap-weighted indexes over the past few weeks can hardly be considered a mean-reversion following the initial relative leadership by the equal-weight indexes directly off of the lows. If anything, the strong equal-weight bounce off the lows was the mean-reversion.
The larger point is that this relative under-performance of equal-weight indexes is a trend we observe across numerous sectors and market segments, not just the Russell 1000. And we have observed it for 5 months now. Therefore, in our view, this issue should not simply be viewed in the context of judging the quality of the bounce off of the September lows. It should be viewed as a larger, more significant challenge to the longer-term sustainability of the stock market rally.
For, even as the major average are once again approaching their former highs, they are doing so on the backs of a diminishing number of stocks.
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More from Dana Lyons, JLFMI and My401kPro.
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Fed is participating plenty and will increase until all naysayers are reduced to tears.
William Dudley, NY Fed president, stock melt-up wizard hasn't arrived at his office yet to instruct his minions at the banks to buy.
Harry Dent, the Federal Reserve is making you look like a fool every day.
Let me be clear, there is no Fed equity market put.
That's *why* we put in the discount window...to keep these ruffians at bay.
Thank you Alan
Unfortunately, the BOJ or the Fed can fix that issue with an utterance of a rumor. Remember what the. BOJ and Dudley did last year at about this time?
I'm definitely part of the non participation group. I will take negative returns over allowing these assholes the privilege of taking my money to the casino. Fuck them all.
seconded
Who cares what these fake markets do nowadays? It's all pre-fixed for the inner circle. Sometimes I still wonder that this has not bean reaally exposed yet...Oh wait, they all work along...
I do think I have a tool to take back some (and more) of what's ours.
http://tripstrading.com/tradealertsp500/
You can argue about what is most important to the fed, whether it's the usd, EMs, china selling treasuries etc but my guess is the DOW/S&P. If they let either of those drop by 10% then the game is up because insurance companies, pension funds, mutuals and ultimately banks will go under due to their exposure on margin based stock purchases. That Monday a while back when they couldn't control the close shared them shitless and they haven't let anything block their way since.
Huh?
The DJIA dropped by 13.7% and the SPX by 12.5% at their lowest point (closing basis) to their lows in Sept.
RUT, MID, DWCPF were down more than 14% at their lows. SOX was off 24% or so and DJTA was off approx 20%.
If you are talking about Aug 24, they controlled the close just fine. Look at the Aug 24 open vs the Fri close,
the Aug 24 low and then Aug 24 close. BUY! BUY! BUY!!! Resistance is futile! You belong to the state!
Wonder what the Fed's balance sheet looks like? Or do they allow Goldman to hold equity in Street Name?
"Lump lingered last in line for brains;
and the ones she got were sorta rotten and insane:
https://www.youtube.com/watch?v=_sj_U6vObUA
The generations to come, if we haven't blown ourselves back into the stone age, will look back to these times and erect a monument with the initials WTF inscribed upon it.
Can anyone tell me what dividend income has been like out of the US stock market?
With cheap debt and buybacks gushing, it's a false indicator anyway (if you can even find it).
try here: http://us.spindices.com/indices/equity/sp-500
click on ADDL INFO then Index Earnings, its excel and several sheets but pretty good info, esp funny is the projections for 2016!
total dividends paid have doubled on the sp500 since 2010; but up only about 35% since 2007. profits per share have risen dramatically too, but total float is decreasing by about 3% per year due to buybacks and eps have started to roll over on a 12month trailing basis. recently a lot of earnings has come from the financials since they are paying less in fines and legal holdbacks...but not enough to offset energy and other sector slowdowns. financial 'earnings' can and do evaporate overnight if rates move to fast or borrowers start defaulting en mass....as may have started as seen in the 30 day auto loan lates....july was 20B in balances 30 days late...highest since 3q2009 and well well off the lows from two yrs ago.
the fuse is lit, just cant see how much line there is to the powder kegs.
id post the chart here but cant.
SC, santander consumer is a subprime auto loan originate to secrutize-er; their stock may indicate when the first putbacks occur.
all those roughnecks in mancamps arent buying trucks anymore
...just noticed SC stock plummet perhaps we are pulling into the station now. they beat estimates and now the stock is off 25% in 3 days since reporting. at first glance they are sitting on 2.7B of loans for sale....up from a mere 46million previous quarter....people already going late before second payment hits.....some dealerships are now paying the first loan paymnet along witha tv and cruise etc.
"but my guess is the DOW/S&P. If they let either of those drop by 10% then the game is up because insurance companies, pension funds, mutuals and ultimately banks will go under due to their exposure on margin based stock purchases."
That's right. They will prop up the DOW and S&P at all costs. Much better than MM funds.
DJ30 is even worse...all it takes is for 1 or 2 tickers to be bought up by the fed and the index takes off. Our indices are as bad or worse than China.
Every other economic indicator in the USA is manipulated (CPI, employment, gold etc), so why not the stock markets too?
And to make it even worse, IMO, is the money used to manipulate the markets is fed created debt, financed by the taxpayers.
That is because the only people buying are the shorts and the FED.
The stock market is dead as is the free market economy of the U.S.
<-- BTFATH
<-- to the FAZmobile
Good the cronies that are running the show dont deserve it. People are smarter than it appears. As long as the top tier hoards their money what's the point?
Its probably the goal, as soon as all pesky retail serfs are finally out of stawks then the banks can own it all outright.
When Buffett bought Burlington Northern back in '09 or '10 or whenever it was, I had been a shareholder for approx
14-15yrs. The BNI story that compelled Buffett to buy was no diff than what compelled me to buy back in 1994
save for the shale oil revolution. If I had not been compelled to sell to Berk-Hath (and get shares in BerkHath
in exchange), I (and others) would have held out and either (in theory) a) gotten a higher price for my shares (transaction price was 100$ or so),
b) a visit from some thugs w/ Louisville sluggers or c) ignored and simply coattailed w/ Buffett. Given this theory, the moral seems fairly obvious: don't sell
your shares and coattail.
NO SALE--COATTAIL
The majority of Americans think Wall Street works like this:
If you don't participate, they will rip your face off and shit down your neck.
If you do participate, they will rip your face off and shit down your neck.
How much do algos weigh?
If you like your algo ....
you can shove it where sun don't shine!