On an equal-weight basis, the Nasdaq 100 just dropped to a relative all-time low.
There are countless ways to measure the level of participation in a stock market rally. By “participation”, we are referring to the number of stocks that are taking part in the rally. One way is to look at the market’s “internals”, e.g., advances vs. declines, new highs vs. new lows, etc. As an indication of good quality participation, we like to see a high number of each of the former vs. each of the latter. When that is not occurring, even as the indices hold up well, we say that the rally is “thinning”, or seeing a decreasing level of participation. We’ve published multiple examples of this internal weakness in recent weeks.
Another way of measuring participation within a rally is by looking at indices on an equally-weighted basis instead of a cap-weighted basis. In the latter, an index may remain propped up by a relatively few number of stocks, if they are among the largest and most heavily weighted in the index. When that is the case, the market may be susceptible to weakness since it is being supported by just a relatively small number of issues. A couple of them go by the wayside, and the market does not have that broad support to compensate. One of the current rally leaders may be falling into such a predicament now.
There is no doubt that tech stocks and large-cap growth stocks have been among the relative strength leaders during this bull market, especially throughout 2017. However, as we see in today’s Chart Of The Day, the durability of that leadership may be at risk, if we can consider the Nasdaq 100 (NDX) as representative of those stock groups. The reason we say this is because the equally-weighted NDX is now badly lagging the cap-weighted version.
Specifically, the relative performance of the Nasdaq 100 Equal Weight ETF (QQEW) just hit an all-time low when compared with the cap-weighted QQQ ETF.
The inception of the QQEW was in 2006, so an “all-time” low is really just an 11-year low. Even still, as the chart shows, the relative ratio hit proximate lows in 2008, 2012 and 2015-2017. The recent break below those levels is not, in our view, a trivial event.
[ZH: and as we noted previously, there is an even greater concentration going on currently as traders appear to be rotating from FANG stocks to AAPL]