Phoenix Capital Research: There’s Something “Unusual” About This Market Rally… I Think I Know What It Is
Stocks are bullish, despite some negative day-to-day headlines. The S&P 500’s 200-day moving average is moving higher. That’s a good sign that the bear market of 2022 is receding rather than likely to swipe again.
However, there are some divergencies between the overall market headline and some specific sectors. They’re warning of potential danger for investors in some parts of the economy now.
For instance, retail stocks are, on average, still trading near their October lows. And tech stocks, which usually trade with inflation-adjusted Treasuries, have soared in value. Yet Treasury yields have dipped instead.
This divergence can largely be explained by the nature of market indices. They have a weighted value. Larger companies make up a bigger part of the markets, and they also make up a bigger part of the index.
Today, a handful of big tech companies account for nearly 25 percent of the S&P 500’s weighting. If there were an equal weighting of S&P 500 companies, the index would be down. Most companies are down this year as well, a fact unseen in the headline market numbers.
A divergence can be resolved in one of two ways. Underperforming assets can catch up. Or overvalued assets can decline. With the fearful headlines right now, it’s likely that smaller stocks can rally. But they’ll need strong earnings to maintain that move higher.