Casting a Wider Net The new term du jour is “bear market rally,” and the exercise du jour is trying to determine if any uptrends we see in markets are simply brief rallies in an otherwise downward trending period, or if they’re indications that we’re entering a new phase of positive momentum.
There are various ways to splice the price action and attempt to make a call on the above. I’m going to choose three indicators in order to gauge my confidence level with recent rallies.
The first, and perhaps most promising, is a simple comparison of the S&P 500 equal weighted Index vs. the S&P 500 market-cap weighted index (the one we use most often).
Given that the five largest companies in the S&P 500 (Apple, Microsoft, Alphabet, Amazon, and Tesla) make up nearly 25% of the index, performance numbers are heavily influenced by a very small set of names.
What I want to see is a strengthening in performance from the other stocks in the index, which would give me more confidence that the market has more durability beyond the big names.
So far in 2022, the equal weight index has outperformed the market cap weighted index by more than 5 percentage points, one indication that the market is quietly starting to exhibit better breadth.
Second, I wanted to look at the action that happened during each of the brief rallies we’ve seen in 2022.