Here's a strange pair of facts. On Friday, Oct. 9 the S&P 500 closed at 7,811.54, a whisker under its record. The same day, only one-third of the stocks inside it were above their 50-day moving average. Two of every three were sagging. Spencer Jakab took that up in Tuesday's Heard on the Street. His first point is calm. His second one isn't.
The calm point first. Jakab writes that a weak breadth reading like this rarely leads to a pullback, and when it does, the drop is usually small. Narrow markets are also normal. Over long stretches, most stocks lose money or go nowhere. A small group of winners has delivered half of the market's gains in the last hundred years. So a few leaders doing the work is how it usually goes.
The worry is the size of the gap. Jakab compares two versions of the same index. The regular S&P 500 weights each company by its market value. The equal-weight version puts the same dollars in every stock. ChatGPT came out in November 2022. Since then the regular index is ahead of its equal-weight twin by nearly 50 points of total return. Jakab lines that up with 1996. Count the same number of trading days from Yahoo's IPO, and the lead back then was almost the same size. His history lesson is simple. When a few giants pull that far ahead in a few short years, the catch-up has come faster than the run-up, and usually with a bear market. It happened with radio stocks, the Nifty Fifty and the dot-coms. His line is that “this time probably isn't different.” That's his forecast. We'd call it a reading, since nobody times these.
The money is still arriving
The same page carried a two-paragraph brief from Gunjan Banerji. For 13 months in a row, more money has gone into U.S. stock funds than has come out. EPFR's records start in 2000, and that's the longest run in them. Most index money, in our experience, sits in funds that track the regular index, so each new dollar buys the same few leaders in the biggest amounts. Jakab's last point is the one to remember. Equal weight has actually beaten the S&P 500 since 1990. The reason is that it tilts toward smaller and cheaper stocks. When it catches up, it does so fast. “Like a rubber band stretched tight,” he writes.
Our read
We wrote about this on Oct. 1, when the third quarter belonged to four stocks and equal weight lost. What's new is the breadth number, the Yahoo-sized gap and 13 months of inflows. None of it is a timing signal. This is Investments/Risk, IN04. The practice holds the equal-weight S&P 500 fund, RSP, at weight in 2 books, nothing added. It's there so that not every index dollar rides on the same ten names. The S&P 500 closed Tuesday, Oct. 13 at 7,805.45, under the 7,818.93 record from Oct. 6. We're not chasing. The desk's rule for new money stays the same, and only one of its three conditions had passed through Tuesday.
Now the check that's yours. Most people own the S&P 500 through one fund in a 401(k), and they think of it as owning 500 companies. Pull up that fund's fact sheet this week and find the line for its top ten holdings as a share of the fund. That number is how much of your index money rides on a handful of stocks. If it's bigger than you expected, ask how the rest of the plan balances it, with bonds, bills or an equal-weight sleeve, and bring that line to your next review. You don't wait for the band to snap to notice how far it's stretched. We'd rather look now, while it's a chart and not a loss.