• 12 hours Bezos’ Next Big Project Could Be Worth $100 Billion Per Year
  • 14 hours 3,600 Years Later, Climate Change Turns Mammoths Into $40M Market
  • 18 hours Tesla, Apple Claim China Is Stealing Intellectual Property
  • 20 hours EV Giants Duke It Out For Battery Dominance
  • 2 days Tech Billionaire Takes Aim At Google
  • 2 days Chinese Police Bust Largest Ever Illicit Crypto Mining Operation
  • 2 days Expect A Pullback Before Gold's Next Major Rally
  • 2 days Why Interest On Gold Matters
  • 2 days Ten Extravagant Food Items For The Wealthy Only
  • 3 days Why Saudi Arabia Won't Give Up On The Aramco IPO
  • 3 days $32 Million Crypto Heist Halts Tokyo Exchange
  • 4 days Is A Gold Selloff Looming?
  • 5 days Central Banks Are Stashing Gold And Dumping Treasuries
  • 5 days Three Cannabis Trends Flying Under Investors’ Radars
  • 5 days $1.3 Billion In Cocaine Found On JPMorgan Vessel
  • 6 days Amazon Teams Up With Lady Gaga To Win Over Generation Z
  • 6 days Dollar Falls As Powell Teases Rate Cuts
  • 6 days Will The World's First Trillion Dollar Company Ever Bounce Back?
  • 6 days Many Americans Will Never Stop Working
  • 7 days Mozilla vs DarkMatter: The Cyber Espionage End Game
Billionaires Are Pushing Art To New Limits

Billionaires Are Pushing Art To New Limits

Welcome to Art Basel: The…

The Problem With Modern Monetary Theory

The Problem With Modern Monetary Theory

Modern monetary theory has been…

  1. Home
  2. Markets
  3. Other

Will A Lagging RSP/Weak Breadth Kill The Stock Rally?

Concern Or Showstopper?

The S&P 500 is a capitalization-weighted index, meaning larger companies carry a larger percentage weighting. An equal-weighted S&P 500 Index (RSP) looks at all 500 components equally. Therefore, when RSP lags the S&P 500 (SPY), it tells us that the S&P 500 is being lead by the larger companies in the index and some of the smaller companies are lagging (see 2015 chart below). Therefore, the RSP/SPY ratio is another way to track market breadth or participation in a stock market advance. It is easy to see RSP has been and continues to lag in 2015.

Equal-Weight S&P 500 Daily Chart


What Does History Tell Us?

Is it possible for the S&P 500 to advance for a significant period time when RSP is lagging SPY? Said another way, is a downtrend in the RSP/SPY ratio a showstopper for the S&P 500 rally? In 2006, the RSP/SPY ratio was falling; during the same period the S&P 500 gained almost 5%.

Equal-Weight S&P 500 Daily 2006 Chart

In 2007, the RSP/SPY ratio was falling; during the same period the S&P 500 gained almost 13%. The divergence lasted for roughly four months.

Equal-Weight S&P 500 Daily 2007 Chart

In 2011-2012, the RSP/SPY ratio was falling; during the same period the S&P 500 gained over 28%. The divergence was in place for eight months.

Equal-Weight S&P 500 Daily 2011-2012 Chart

Is market leadership by the largest companies a rally killer? History says no. All things being equal, we prefer to see a more robust RSP/SPY ratio. The ratio is relevant, just not a good timing tool when viewed in isolation.


Breadth May Be Ready To Improve

As noted via a November 3 tweet, it is possible the current rally is on the verge of broadening out (having a greater percentage of stocks provide leadership).

Chris Ciovacco Tweet

 

Back to homepage

Leave a comment

Leave a comment