Equal Weighted Index Highlights Megacap Abandonment
One of the most interesting things about the rally since early November is the broad participation by smaller companies, and the near-total abandonment of megacaps. For example, the S&P 500 made new 52-week highs in five of December’s first eight sessions. However, only two of the 10 biggest U.S. companies by market cap accomplished the same feat: Alphabet and Tesla.
This chart compares the S&P 500 to the Invesco S&P 500 the equal-weighted ETF (RSP). RSP is equal weighted, holding roughly the same amount of each company in the index. SPX is market-cap weighted. More than one-tenth of its portfolio is dedicated to just two names: Apple and Microsoft.
The relative strength indicator shows how SPX has outperformed RSP for most of recent history. This began to fade in early September when the big Nasdaq stocks had frothy tops. The trend of big caps lagging has intensified since the beginning of November. Just look at how companies like Snap and Roku have sailed to new highs, while larger peers like Facebook and Netflix have gone nowhere.
Also notice that RSP’s outperformance has lasted roughly 60 bars (with brief dips), much longer than periods in late 2016 and early 2019. The current phase compares with the early 2013, which was followed by a steady rally to new highs. The magnitude of its outperformance is also greater than previous times.
Overall, this pattern is consistent with wider breadth and risk appetite because it shows investors are bullish on smaller and lesser known companies.
Similar behavior is evident on the Nasdaq by comparing QQQ against QQEW.
TradeStation is a pioneer in the trading industry, providing access to stocks, options, futures and cryptocurrencies. See our Overview for more.
This chart compares the S&P 500 to the Invesco S&P 500 the equal-weighted ETF (RSP). RSP is equal weighted, holding roughly the same amount of each company in the index. SPX is market-cap weighted. More than one-tenth of its portfolio is dedicated to just two names: Apple and Microsoft.
The relative strength indicator shows how SPX has outperformed RSP for most of recent history. This began to fade in early September when the big Nasdaq stocks had frothy tops. The trend of big caps lagging has intensified since the beginning of November. Just look at how companies like Snap and Roku have sailed to new highs, while larger peers like Facebook and Netflix have gone nowhere.
Also notice that RSP’s outperformance has lasted roughly 60 bars (with brief dips), much longer than periods in late 2016 and early 2019. The current phase compares with the early 2013, which was followed by a steady rally to new highs. The magnitude of its outperformance is also greater than previous times.
Overall, this pattern is consistent with wider breadth and risk appetite because it shows investors are bullish on smaller and lesser known companies.
Similar behavior is evident on the Nasdaq by comparing QQQ against QQEW.
TradeStation is a pioneer in the trading industry, providing access to stocks, options, futures and cryptocurrencies. See our Overview for more.
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