The Great Market Equalizer Is Imminent By Lucas Downey, Contributing Editor, TradeSmith Daily If youâre not invested in a select few mega-cap tech stocks, chances are your portfolio is underperforming broader indices.
Iâm talking about the top-brass companies all over the headlines: NVIDIA (NVDA), Taiwan Semiconductor (TSM), and Microsoft (MSFT), to name a few. (Iâve been a holder of the latter for many years.)
Those Wall Street-blessed AI names are easily crushing the S&P 500âs 2024 gains of 15.5%... each ramping 164%, 71%, and 19% higher, respectively.
Hearing the talking heads tout these winning stocks every day may have you envious of these knockout performances. And I donât blame you!
After all, we all want to own the best in class... when theyâre working.
But before you sell all your underperforming stocks and jump whole-hog into these mammoth tech heavyweights, be aware that thereâs potentially a better setup unfolding in the rest of the market.
You have been hearing warnings of weak breadth under the surface of the markets lately. Breadth is âweakâ when few stocks are participating in the rally.
Lately itâs been so weak, one popular measure of the market has recently dropped to 2008 levels, as youâll see a bit later in this article.
Now, to be clear, I canât argue with the fact that so many stocks arenât participating in the latest rally. Itâs an ugly truth right now.
That said, if you get too wrapped up in the conditions of today instead of whatâs coming next, youâll miss a big opportunity set to unfold.
In short, thereâs a huge portfolio equalizer on the way...
Today Iâll show you what I mean, including how you can position yourself for a big change set to rock the status quo.
But first, letâs understand whatâs leading to this big shift... The Top 50âs Massive Lead on the Market To get a true sense of the breadth of the market, letâs look at a few year-to-date performances of different baskets of the S&P 500.
The top 50 largest companies in the S&P, as shown below via the Invesco S&P 500 Top 50 ETF (XLG; green line), are returning an average gain of 22.3% â easily besting the broad S&P 500âs lift of 15.5%.
Even more striking is when you drop the market-cap weighting and take the average return of every stock in the S&P 500 equally. The Invesco S&P 500 Equal Weight ETF (RSP; orange line) has struggled in 2024, clocking in at a modest 4.9% gain: Source: FactSet This market dichotomy has sent the bears out in full force, proclaiming this is a major warning for the market.
Theyâve even concocted a widely shared ratio chart that highlights a market breadth reading that has hit 2008 levels.
A ratio chart shows relative performance by simply taking one asset and dividing it by another.
When you divide the Invesco S&P 500 Equal Weight ETF (RSP) by the benchmark SPDR S&P 500 ETF (SPY), you get a level of roughly 30%.
Check out below how this is the lowest ratio reading literally since 2008: If youâre like most people, this free-falling chart looks scary...possibly even bearish. Plus, itâs just plain unusual for the market to be at fresh highs while the last time we saw this condition was in the depths of a bear market.
But before you reach this conclusion, youâve got to zoom out to the bigger picture... and consider buying a massive class of the market before it plays âcatch up.â Prepare Now for the Great Portfolio Equalizer Thinking back to 2008 is painful for many. The Global Financial Crisis put people out of work and sent stock and home prices plummeting.
But on the other side of that pain, the washout set the stage for one of the greatest bull markets ever.
Now, let me be clear: I donât want to dismiss how trying those moments were. Economic crisis isnât a cakewalk.
That said, retreating to cash simply out of fear turned out to be a huge mistake. Ultra-depressed asset prices led to breathtaking gains months and years later for most stocks.
And Iâm not just talking about the top sliver of mega-caps, either.
To prove this, I went back and isolated all days when the RSP/SPY ratio fell below 31%... right where we are today and where we were in 2008.
The findings may surprise you. - Since 2007, thereâve been 80 discrete days when the RSP/SPY ratio collapsed below 31%.
- All of those instances came in late 2008 and early 2009.
- So, that was the ONLY time in the last 15-plus years when the average stock underperformed the regular, cap-weighted index by this large of a margin.
And hereâs the kicker...
When you review the forward returns during these weak market-breadth moments, a clear pattern emerges:
The Equal Weight S&P 500 steamrolls the regular, cap-weighted S&P 500 by a huge margin.
When the RSP/SPY ratio has collapsed below 31% since 2007: - Three months later, the RSP rips 7.4% versus a 1.6% jump for the SPY.
- Six months after, the RSP soars 29.7% versus a 16% climb in the SPY.
- Twelve months later, the RSP ramps 57%, easily besting SPYâs 35.8% gain.
- And 24 months later, the RSP nearly doubles (a 92% gain), easily trouncing the SPYâs 57.6% rip.
This study reveals two important truths about investing.
First, big opportunities can show up in places you least expect. Powerful reversion trades are commonplace.
Second, and most important, donât blindly assume that bear-fueled insights are trying to help your investing journey... their job is to get engagement and clicks.
History says a great equalizer is coming in the months and years ahead.
That means be on the lookout â because many unloved areas of the market are ripe for fat gains. With the Federal Reserve set to cut interest rates later this year, smaller-cap companies and interest-rate-sensitive firms are especially poised to benefit... like high-quality real estate stocks.
Also donât count out the up-and-coming dividend growth stocks absent from the media headlines.
This is where having cutting-edge software tools like TradeSmith keeps you ahead of the next big move.
Prepare now... get started today. Regards,
Lucas Downey Contributing Editor, TradeSmith Daily P.S. Youâll also hear from me in Jason Bodnerâs Power Trends newsletter, where Jason and I share insights based on his proprietary Quantum Score.
And in Jasonâs TradeSmith Investment Report service, heâs guided his readers to buy companies leading the tech revolution â from software to hardware, and networking: the foundation of AI. Along with open gains of 30%, 79%, and 106% in tech, the portfolio has more open gains on stocks in shipping, homebuilding, and pharma.
Click here to see how Jason can help you sift through the AI noise and uncover the real winners. |