The Average Stock Is Struggling While the Indexes Are Hitting Highs
The relative strength of the Magnificent Seven is creating very confused market sentiment.
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One of the most common market themes in 2024 has been narrow big-cap strength that hides poor market breadth. A few bigger stocks such as Apple AAPL, Tesla TSLA, or Google GOOGL offset poor action in hundreds of smaller stocks.
This phenomenon has been in play again over the last couple of weeks. One of the easiest ways to see this is to compare the S&P 500 (SPX), which is a capitalization-weighted index, to the Equal Weight S&P 500 (SPXEW), in which each stock has equal weight. The S&P 500 is 0.8% away from its all-time high, while the Equal Weight SPY Is about 3% from its high.
Another comparison that shows the disparity is that the Nasdaq 100 QQQ is sitting at its all-time high while the Russell 2000 IWM is about 4.5% from its high.
The divergence this time is even more unusual in that the S&P 500 has had negative breadth for nine straight sessions. That has never occurred before when the S&P 500 was so close to all-time highs.
This sort of market action has been quite common in 2024 and is why the Magnificent Seven MAGS has received so much attention. Anytime there is any weakness in the market, investors flock back to the big-cap names that have been outperforming for so long. It doesn’t matter if they are expensive or technically extended. Investors view these seven names as a safe place to park cash, which attracts more buyers and sends them even higher.
The Magnificent Seven jumped on Wednesday following an in-line CPI report and gave some of those gains back on Thursday when the PPI was hotter than expected, and bonds stumbled. The indexes are bouncing strongly on Friday morning following a strong earnings report from Broadcom AVGO and positive comments about the strength of AI.
The primary market issue as we head into the end of the year is whether the market can broaden so that smaller stocks can deliver the proverbial Santa Claus rally. They have been correcting for a couple of weeks now, and speculative action has slowed dramatically. Bitcoin-related names are still holding, but they have struggled, and the strong momentum has slowed.
End-of-year pressures favor continued relative strength in the Magnificent Seven, but issues with bonds and interest rates are a headwind. The Fed interest rate decision next week will also be a catalyst for a sharp market response.
I’m waiting not so patiently for technical setups in smaller stocks that may see an end-of-the-year rally, but so far, there isn’t much support, and the relative strength of the QQQ is making a mess of sentiment.
At the time of publication, Rev Shark had no positions in any securities mentioned.
