Bears Starting To Throw Some Weight Around

by Dana Lyons

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On a equal-weight basis, the recent stock rally looks less impressive.

Stock bulls have had a nice run of it over the past 4 months. Despite the normal protestations by perma-bears, there was not a whole lot to complain about during the recent rally, until perhaps this week. As we’ve looked at the past few days, a few potential red flags have popped up in terms of lagging small-caps and thinning breadth. Today, we take a peak at one more less-than-ideal recent development. This one has to do with the equal-weight version of the S&P 500.

As the name implies, the equal-weight average weighs each of the S&P’s components the same, in contrast to the popular cap-weighted S&P 500 which places more weight on larger stocks. Cap-weighted averages can give one a distorted view of the health of the broad market at times if they are being unduly influenced by a relatively small number of stocks. On the other hand, an equally-weighted index can give us a better sense of the level of participation across the entire index.

So how does the level of participation look currently? According to most measures, we don’t have many complaints. According to the equal weight S&P 500, specifically the Guggenheim S&P 500 Equal Weight ETF (ticker, RSP), we find a potential chink in the armor.

That’s because, on a relative basis, RSP just dropped to a 5 ½ year low vs. its cap-weighted counterpart, the S&P 500 SPDR ETF (SPY).

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So how much of a concern is this? It certainly is not ideal, as we prefer the equal-weight average to be leading the way as a show of broad participation. However, sometimes the cap-weighted average is simply outperforming due to particularly strong action in the largest stocks. And as long as the absolute price series of the RSP is holding up well, it may not be a huge concern yet.

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