All Things Being Equal

Your feedback on bullishness... More about life beyond the 'Magnificent Seven'... All things being equal... What the S&P 500 Equal Weight Index is doing... An encouraging picture... A surprising bit of history...

Our unpopular bullish picture yesterday stirred some feedback...

I (Corey McLaughlin) love our readers and this gig. After publishing a take like we did yesterday – on what I felt was an unpopular bullish picture – we hear the good and bad and in between, and we get to take note of what you want to hear more about almost instantly.

For starters, several of you came to the defense of Dan and me after reading the criticism from a YouTube commenter who compared us to "Jim Kramer and AOC" because we happened to share a few bullish ideas on a recent podcast episode.

And yet others wrote in over the past 24 hours with some important questions related to yesterday's Digest, which I want to address today... As always, keep the conversation going by sending your e-mails to feedback@stansberryresearch.com.

Your top concern...

Stansberry Alliance member Bill B. said that while he gets our point about a bullish outlook, he's still concerned about the idea of what he called "4 of 5 stocks holding up 95% of the market." And a few others said something similar.

Alliance member Jeffrey G. wrote in...

The chart in [yesterday's] Digest to me says a lot. Many individual decisions are made on those numbers [50-day moving average and 200-day moving average] on markets and individual companies.

Can you show what it would look like without FANG or Magnificent 7, which I understand are overrepresented by value. Or use the weighted average S&P? Just my thoughts and curiosity. I so appreciate what you publish.

Yes, Jeffrey, we sure can. This is a worthwhile discussion, one that we've mentioned in the past few weeks (and which is the subject of our latest Portfolio Solutions issues). Let's now explore it in more depth.

First off, this allows us to mention an essential point for anyone in the markets...

Always know what's in your index...

We wrote yesterday about the S&P 500 Index, the one you hear about on the nightly news and that's plastered on mainstream financial websites. As we noted, it has been trading above its simple technical long-term (200-day) and short-term (50-day) moving averages for several months.

The S&P 500 is weighted by market cap, meaning its largest companies represent a greater share of the overall index than the still-large but comparatively smaller S&P 500 businesses.

For example, Nvidia (NVDA) is a $1 trillion chip company and everyone's favorite artificial-intelligence play, and it represents around 2.8% of the entire index. Meanwhile, retailer Advance Auto Parts (AAP) has a $4 billion market cap – respectable by most standards – but still makes up just a hundredth of a percent of the S&P 500.

The result is when the "mega caps" do well, the headline index that a lot of people follow as the gauge of the entire "market" tends to do the same, and vice versa.

This isn't necessarily a bad thing. When the largest companies in America are doing well, that's notable.

But you have likely heard that the S&P 500's behavior lately has been significantly influenced lately by the so-called Magnificent Seven: Apple (AAPL), Meta Platforms (META), Nvidia, Alphabet (GOOGL), Amazon (AMZN), Microsoft (MSFT), and Tesla (TSLA).

Today, the share prices of these companies account for nearly 30% of the performance of the U.S. benchmark index, and these seven stocks are up an average of 85% for the year. They've kept the S&P 500 moving higher even as the rest of the market hasn't been as strong.

But, as we'll show today, the rest of the market might not be as weak as some may make it sound, either... And what we've seen lately with the biggest of mega-caps leading the way is perhaps, counterintuitively, a sign of possible new highs ahead...

In other words, just following the S&P 500 Index can obscure other stories and trends beneath the surface – for worse or better.

Here's the real story today beyond the 'FANGs'...

For a look at the broader market performance, look today at the recent performance of the lesser-followed equally weighted S&P 500 Index, as Jeffrey suggested.

In this index, each of the S&P 500 companies gets an equal share (0.2%) of the index pie. In other words, Nvidia or another Magnificent Seven company is valued the same as Advance Auto Parts or any other S&P 500 member.

This index takes out the market-cap bias, which is what we want to do. At the same time, it has its own bias... Since a handful of stocks or a sector can move the index significantly, it can be more volatile than the standard S&P 500. But it's useful to use in a full market analysis.

Here's a one-year chart of the S&P 500 Equal Weight Index, with lines for simple technical long-term and short-term moving averages overlaid, like we did for the S&P 500 Index yesterday...

At a glance, this may look like an inconclusive mess. The Equal Weight Index has traded more sideways than the market-cap-weighted version. It's below its high from earlier this year. And it's up "only" 11% over the past year versus the S&P 500 Index's 15%.

Just a few days ago, the regular S&P 500 was beating the Equal Weight Index by 10 percentage points.

But in general, I see the same unpopular bullish picture playing out for both indexes...

First off, look back at October 2022 in the chart above. In what makes it increasingly look like a bottom, the Equal Weight Index hit lows and hasn't returned to that level since. In fact, it's up roughly 20% since October.

If anything, it was the Equal Weight Index that got a bit overextended earlier in the year... It hit highs above the market-cap-weighted S&P 500, then appropriately pulled back to lower lows in March amid the banking panic before starting a push higher to current levels.

About a month ago, the Equal Weight Index's 50-day moving average once again crossed higher than its 200-day moving average. You could say this is a weaker picture than the market-cap-weighted S&P 500, which has been trading above those averages consistently since March.

But the picture is still encouraging...

Maybe most important, the S&P 500 Equal Weight Index's long-term trend has stopped falling.

When you zoom out a bit to a five-year time frame, you may get a better sense of why this action could be important. It has tended to happen near the beginning of longer moves higher for the broader market rather than at the end...

This doesn't mean the trends can't break down ahead... or that I can tell you what's going to happen in the future... or that a recession isn't coming eventually.

I would want to see the Equal Weight Index get above its highs from earlier in the year (and last summer's "bear market rally") before declaring that a new full-fledged bull market is here to stay. But the action since March (and last October) is encouraging.

The Equal Weight Index is up 10% since its March lows and is nearly 4% higher in the past month.

This may also be an opportunity...

If you're still convinced that a handful of stocks is the only thing powering the entire market higher, or if you now think the market is relatively stronger than before you started reading this Digest, there may be an opportunity for you...

As Stansberry Research senior analyst Brett Eversole recently shared in our free DailyWealth newsletter, when the S&P 500 Index significantly outperforms the Equal Weight S&P 500 Index, as it was doing until just a few days ago, this is actually a bullish sign. As he said...

Many believe that this setup will doom the current stock market boom. But history shows us otherwise. In fact, this misunderstood situation could lead to massive gains in a specific stock index.

He was talking about a dynamic that has been playing out with the S&P 500 Index and the S&P 500 Equal Weight Index...

Specifically, the difference between the trailing two-month returns of these indexes hit 6.2 percentage points earlier this year. This shows just how strong the outperformance is. Similar setups have only happened five other times since 1990.

This might sound like a bad omen for stocks. Most folks would expect tough times ahead when the market-weighted index crushes the Equal Weight Index. But the exact opposite happens.

It's not the big stocks that slow down... It's the smaller stocks that catch up. Take a look...

As you can see, the S&P 500 beat its typical return in the months after these setups. The market-weighted index jumped 6.6% in six months and 12.6% in a year. But the truly massive gains happened in the Equal Weight Index...

The Equal Weight Index has averaged a roughly 27% gain over the following year each time we've seen behavior like we have recently. That's three times higher than usual.

If anything, when it seems like the biggest companies are carrying the market significantly, "the rest of the market catches up to big players" afterward, Brett said. And the market-cap-weighted S&P 500 Index outperforms, too, rather than crashing.

As Brett mentioned, as this story plays out, it's worth considering exposure to the S&P 500 Equal Weight Index. You can do it through a vehicle like the Invesco S&P 500 Equal Weight Fund (RSP) or a similar exchange-traded fund that tracks the equally weighted S&P 500. These funds will rise by more than the regular S&P 500 Index if smaller companies surge to keep up with the Magnificent Seven.

New 52-week highs (as of 7/10/23): Adobe (ADBE), Booz Allen Hamilton (BAH), Covenant Logistics (CVLG), Commvault Systems (CVLT), Dice Therapeutics (DICE), DraftKings (DKNG), Floor & Decor (FND), Global X MSCI Greece Fund (GREK), W.W. Grainger (GWW), Intercontinental Exchange (ICE), Ingersoll Rand (IR), Iron Mountain (IRM), New York Community Bancorp (NYCB), Parker-Hannifin (PH), Pure Storage (PSTG), TE Connectivity (TEL), and VMware (VMW).

In today's mailbag, more feedback on the unpopular bullish picture we wrote about yesterday... and a thought about a note in yesterday's mail... Do you have a comment, question, praise, or rage? As always, e-mail us at feedback@stansberryresearch.com.

"If the panic over interest rates has subsided, perhaps it is just a matter of mathematics. The jump from 1% to 2% is double. After that, .25% on top of 5% seems inconsequential." – Subscriber Rudy F.

"I totally agree with Jon J. The action on the market today is living proof that investors are stuck between a rock and a hard place. Investors have only two choices, either invest in great companies or put your money in banks (ugly history) or keep it in cash and money market instruments which the people at the Fed and central government can manipulate at will with crazy and irrational interest rate policy. And if you look at the past, that hasn't worked out well...

"Over the years we have been through several presidents and Fed-manipulated economic hiccups (high inflation and interest rates in the 80s), the financial ass whipping in 2008, and several other issues, and where is the market today? And look at the health of the world markets. Europe, China, and most every other country are in a slide backward. The only silver lining is the U.S. stock market. Money goes where it's treated best. Like it or not, that's the U.S. stock market. Foreign investors are going to flock here because the alternatives are not so great. IMO." – Subscriber John M.

"I've never seen nor read any research delivered like The Stansberry Report/s. I'm not officially a paid client, yet. But that will change." – Subscriber Curtis W.

Corey McLaughlin comment: We'll be delighted to have you. To anyone who has recently found us, you can find some more information on our 30-plus research services here. And stay tuned to the Digest as we share the latest information and opportunities from our editors and analysts.

All the best,

Corey McLaughlin
Baltimore, Maryland
July 11, 2023