• 99 days Could Crypto Overtake Traditional Investment?
  • 104 days Americans Still Quitting Jobs At Record Pace
  • 105 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 109 days Is The Dollar Too Strong?
  • 109 days Big Tech Disappoints Investors on Earnings Calls
  • 110 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 111 days China Is Quietly Trying To Distance Itself From Russia
  • 112 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 116 days Crypto Investors Won Big In 2021
  • 116 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 117 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 119 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 120 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 123 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 124 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 124 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 126 days Are NFTs About To Take Over Gaming?
  • 127 days Europe’s Economy Is On The Brink As Putin’s War Escalates
  • 130 days What’s Causing Inflation In The United States?
  • 131 days Intel Joins Russian Exodus as Chip Shortage Digs In
  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