As our update came out last Monday, the S&P 500 was off by more than -1.5%. This is considered to be an “outlier day” that will often temporarily startle investors. We wrote in last week’s update:
“When volatility gets low and compressed [as it does in a bull market], it will eventually “pop,” typically down, to relieve some of the pent-up pressure… We will continue to monitor the markets for any changes in environment, but most of the time, a day like Monday results in the markets moving back towards normal market behavior.”
So far, this quote has been accurate. After falling more than -1.5% last Monday, the markets rebounded back to close the week off at a new high. The market was hit in the face with a cold glass of water, and needed some time (in this case, a few days) to get its bearings.
What is the current state of the markets?
Market breadth remains weak. While the S&P 500 is rising to new highs, it has been one of the stronger indexes. Why? Well, as we have posted in the past, the S&P 500 is largely made up of technology-related stocks. Take a guess at what the strongest style index has been? If you guessed “large-cap growth,” you’re right. Large cap growth is #1, and the S&P 500 is right behind it. Small-caps and mid-caps have not performed nearly as well as large-caps over the last few months. Both small-caps and mid-caps have been flat-to-down as since the spring.
The table below shows the Style Index rankings, along with the EAFE (Europe, Asia, Far East) and Emerging Markets.
|Style Index||Risk Adjusted Ranking|
|Large Cap Growth||1|
|Large Cap Blend (S&P 500)||2|
|Large Cap Value||3|
|Mid Cap Value||4|
|Mid Cap Blend||5|
|Mid Cap Growth||6|
|Small Cap Value||8|
|Small Cap Blend||9|
|Small Cap Growth||10|
Source: Canterbury Investment Management
Large-cap equities are leading the markets, and small cap stocks are lagging. As a side note, we can see the emerging markets is in last place. While the broad markets have been in a bull markets, not all equities are seeing a rise. In fact, if we look at China, it is in a bear market:
Growth is leading the market, specifically in large cap securities. David Vomund, an expert market technician, pointed out in his market update that market breadth is thinning. He states, “if you take out the FAANG [Facebook, Apple, Amazon, Netflix, Google] (and Microsoft) names the market looks very different. That’s why the equal weight S&P 500 has drifted sideways for 2 months.” The cap-weighted S&P 500 is being led by technology-related stocks.
Although the market is being led by technology-related stocks (Healthcare and Real Estate are also highly ranked), other segments are falling off. Small-caps and mid-caps are weak compared to larger securities. Some foreign equities, as shown in the chart of China, are underperforming US equities.
Now, none of this means doom-and-gloom for the markets. These are just signs to pay attention to. The point is that there are strong areas of the market and weaker ones. We need to be able to tell the difference between what is a good area to be in and what is not—and then adapt the portfolio accordingly.