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As Indices Rise To Records, More And More Individual Stocks Sink

By Michael KramerStock MarketsAug 21, 2020 06:06AM ET
www.investing.com/analysis/as-indices-rise-to-records-more-and-more-individual-stocks-sink-200534799
As Indices Rise To Records, More And More Individual Stocks Sink
By Michael Kramer   |  Aug 21, 2020 06:06AM ET
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This article was written exclusively for Investing.com

The S&P 500 advanced to a record close on Aug. 18, completely erasing the March sell-off. But, despite the appearance of a healthy stock market, trouble looms beneath the surface.

The number of stocks above their 50-day moving average has been declining over the past few weeks, while the S&P 500 equal-weight ETF has been unable to pass its June 8 highs.

There have been plenty of large-cap stocks that have been left behind in this rally, and in recent weeks, a few have even moved back below their 50-day moving average. Companies such as Intel (NASDAQ:INTC), Micron Technology (NASDAQ:MU) and AT&T (NYSE:T) have recently plunged back below their 50-day moving averages.

Meanwhile, the SPX continues to be led higher, pushed up by just a handful of stocks such as Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB), and Nvidia (NASDAQ:NVDA).

RSP Daily
RSP Daily

Disparity Between RSP And SPY

Nothing highlights the sharp divergence better than the Invesco S&P 500® Equal Weight ETF (NYSE:RSP), which has fallen by around 5.5% in 2020 versus the SPDR S&P 500 Fund's (NYSE:SPY) gain of about 5%. The main difference is in the construction of the index, with many of the significant technology stocks accounting for and getting larger weightings due to their gigantic market capitalizations in the main index. 

Losing Momentum

More importantly, it seems that the number of stocks above their 50-day moving average has been declining, suggesting the recent rally has been getting even more selective. Since Aug. 12, the number of equities above their 50-day moving average in the S&P 500 has declined to 68% on Aug. 20 from 81.2% earlier in August.  

Meanwhile, the advance-decline line, which tracks the number of stocks rising and falling, in the S&P 500 recently peaked on Aug. 12 at 1222.53. Since that time, that line has been trending lower despite the S&P 500 index going on to make that record close.

SPX Advancers / Decliners Daily
SPX Advancers / Decliners Daily

Overall, the number of declining stocks with positive momentum would seem to suggest that the recent rally is weaker than it would seem, and one must wonder just how much longer the rally can remain sustainable. After all, with companies like Intel and Micron dropping sharply in recent weeks, it could even be sending warnings about the health of the sector they represent.

SPX Daily
SPX Daily

Not All Have Recovered Equally

The weakness across stocks and sectors is relatively broad with Citigroup (NYSE:C), Eli Lilly (NYSE:LLY) and Exxon Mobil (NYSE:XOM) all struggling to recapture or hold on to moves above their 50-day moving average. The weakness across this large group of stocks is likely one reason why the equal weight ETF has underperformed by such a wide margin as the ETF does not give a higher weighting to the companies with larger market caps.

While it is great to see that the S&P 500 has recouped all of its losses from the February and March lows into the nationwide shutdown, it comes with the caveat that not all stocks have recovered equally, and that not all stocks have seen a sharp rebound. If anything, the recent highs in the market could even highlight the disparity between stocks and sectors.

Only time will tell just how sustainable the rally is and whether higher highs are on the way.

As Indices Rise To Records, More And More Individual Stocks Sink
 

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As Indices Rise To Records, More And More Individual Stocks Sink

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Comments (16)
Tom Jones
Tom Jones Aug 24, 2020 4:15AM ET
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Yup, the long SPY/short RSP pair trade has worked very well. Now I think naked long SPY puts or high cost debit put spreads may outperform the pair, as vol is low so options are cheap. I just dont see where to rotate into since XRT and XHB are already overextended and XLE and XLF will be dead money until we have a proven safe and effective vaccine, which isnt likely until 2Q21, assuming enough people worldwide are willing and able to get innoculated.
James Rappold
TraderSkater Aug 24, 2020 12:51AM ET
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My portfolio has always followed in the indices to a certain extent, unit the past few weeks where it has seemed useless. I cant use them as a guide to see how my investments are performing lately because there’s no correlation. I was down on friday 3.4%, while all other indices were up. I just wonder how long the top few stocks will continue its rise, far away from the broader market...
Manish Sinha
Manish Sinha Aug 23, 2020 6:57AM ET
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Hi yoir articke is always about negativity in stock market but still it has increased.. i think you shoukd look broader pictutre.. thanks!
Rhuephus Phuche
BoojumSnark Aug 22, 2020 5:13PM ET
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well .. when you have 1 or 2 stocks in an index of 500, which those 1 or 2 comprise about 80-90% of the value of an index, the index relativity loses its usefulness
STRICKLYD trader4life
STRICKLYD trader4life Aug 22, 2020 1:41PM ET
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interesting to say the least. personally waiting in a big flush, with the election being focal point.maybe even 4-8% move
Vik Knowledge
Vik Knowledge Aug 21, 2020 4:42PM ET
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good one
Jan Matos
Jan Matos Aug 21, 2020 10:16AM ET
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Good article.
Ravi Chandra
Ravi Chandra Aug 21, 2020 10:06AM ET
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Great article.
Cornel Pod
Cornel Pod Aug 21, 2020 9:09AM ET
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Great article. A pullback is in the works for a few days IMO. Long term is still up in my view. Not financial advice to anyone
Jose Mibaresh
Jose Mibaresh Aug 21, 2020 8:07AM ET
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just some rotation
Tom Jones
Tom Jones Aug 21, 2020 8:07AM ET
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Rotation into what, exactly? Value isnt ready for inflows yet given high uncertainty w vaccine and spread due to reopening schools, esp colleges. XRT and XHB have already overrun, so what is left for rotation? Not XLF with negative real int rates and which contains too many regional banks which will see huge loan defaults from small biz?
Daniel Morel
Daniel Morel Aug 21, 2020 7:59AM ET
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I’ve been in the market for the past 55 years, and I look at yearly and monthy trends thus only becoming rich slowly - like we do in Europe And unlike The narrow daily or weekly view of the US where they tend to be concerned about the minors ripples on the surface. What I see missing in the analysis is the historical perspective and the fact that it is always the case that some sectors are leading then rotation due to the confluence of events (like a vacine) will grant another day to the laging sectors. I’ve got a lot of travel, gaming, banks, cruises and airlines stocks that i keep buying on dips. I will be sitting on them for two or three years and I don’t mind. On the other hand I’ve been buying NVDA a $25 and Facebook at $17 and I’m still sitting on those.
Cornel Pod
Cornel Pod Aug 21, 2020 7:59AM ET
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Really well said and very wise. Buying properly is more than half the equation. Evidently you're not affected by FOMO disease spread by MSM.
Daniel Morel
Daniel Morel Aug 21, 2020 7:59AM ET
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Cornel Pod thanks - and no indeed not - but stop watching all those financial news sites. They are thwre to collect advertising dollars and short on providing insights - the worse being Mr. Cramer and the likes. It is entertainment not education. The more screens the worse the results.
Tom Jones
Tom Jones Aug 21, 2020 7:59AM ET
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Kudos to you for being a buy and hold long term investor. When did you start buying AAPL and AMZN?
TippCityTom
TippCityTom Aug 21, 2020 7:50AM ET
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Well done and informative
William Robbins
William Robbins Aug 21, 2020 7:49AM ET
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Thank you for this informative article as the S&P 500 attempts all time highs.
Italo Balbi
Italo Balbi Aug 21, 2020 7:36AM ET
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Yeap! We have to watch out the 50-days moving average
Imran Ali
Imran Ali Aug 21, 2020 6:51AM ET
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good one👍🏻
Leo Kiambi
Leo Kiambi Aug 21, 2020 5:12AM ET
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beautiful article!
 
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