Ironically, the circumstances within the NASDAQ 100 are eerily similar. Take a look at the performance of First Trust Equal Weight NASDAQ 100 (QQEW) versus PowerShares NASDAQ 100 (QQQ) at different periods. Year-to-date, QQEW is underperforming QQQ. Once again, this is evidence of less-than-ideal participation. During the three years prior, however, QQEW kept pace with QQQ.
The relative underperformance of equal-weighted ETFs can be observed across numerous sectors as well. Year-to-date since the summertime, the Guggenheim Equal Weight Technology (RYT) is struggling relative to the market-cap weighted SPDR Select Sector Technology Fund (XLK). Less participation (a.k.a. less market breadth) is typically an undesirable omen. Once again, take note of the healthier participation in the previous three years.
None of these observations definitively prove that the current rally is doomed in the near-term. On the contrary. As discussed last in last week’s commentary on our current allocation for moderate growth and income clients, we embraced the successful retest of the August lows for SPY and QQQ in late September. We bumped the 50% equity component up to 60%, which is roughly 5% shy of a 65-35 standard.
That said, the internal weakness across components of popular benchmarks like the Russell 1000, S&P 500 and NASDAQ 100 should not be ignored. If that weakness intensifies, as it did in in May, June and July of 2015, we would likely raise cash levels as we did in the summertime. What’s more, investorsshould keep in mind that bond investors are still somewhat skeptical about the sustainability of the stock rally beyond calendar year 2015. The spread between high yield (BBB) and comparable treasuries is still elevated and the spread is still greater than what it was in mid-September.
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