Market Breadth Weakens as Technology Rises
Last week the stock market was driven by three big technology companies: Apple, Nvidia, and Microsoft. Apple stocks went up by 8%, Nvidia by 9%, and Microsoft by 4%. These gains helped the S&P 500 index rise by 1.5%. However, the Equal Weight S&P 500 index, which represents the average stock in the S&P 500, fell by 0.50%.
Market Breadth
Since the end of May, we have seen a negative divergence in market breadth. This means that while the S&P 500 has gone up in June, most stocks have actually gone down. Recently, markets have been led by the largest companies in the Information Technology Sector, which makes up 30% of the S&P 500’s capitalization. The market itself was up by 1.5% last week, but nine out of eleven different market sectors went down. Only Information Technology saw a rise, going up more than 5%.
Negative divergences in market breadth happen occasionally. The current divergence has only been ongoing for two weeks, and while it might resolve soon, it’s not ideal to see this trend continue for too long. Long-term negative divergences in market breadth can lead to significant declines.
Small Cap Stocks
When people say "the market," they usually think about the S&P 500. But the S&P 500 only includes the 500 largest US companies. To understand smaller companies, we look at the Russell 2000.
The Russell 2000 has been performing poorly compared to the S&P 500, hitting new low points in relative strength. This means, whether markets are up or down, smaller stocks in the Russell 2000 are generally not doing well. Year-to-date, the Russell 2000 is flat or slightly down, still 18% below its 2021 peak.
While large-cap stocks have generally been rising, this hasn’t helped smaller stocks. We've even seen some inverse small cap ETFs show up in our rankings, indicating that smaller stocks are under more pressure.
Chart of the Week: EXR
The Real Estate sector has been one of the weakest market sectors over the past two years, down about 25% since its peak in 2021. However, some smaller stocks within this sector are showing signs of improvement. This week's highlighted stock is Extra Space Storage (EXR).
- Moving averages: The 50-day moving average (green line) has been below the 200-day moving average (blue line) for two years. But earlier this year, the 50-day MA crossed above the 200-day MA, known as a “golden cross”, indicating a potential long-term trend change.
- Price movements: EXR has been moving sideways but recently broke through the $150 resistance level due to buying pressure.
- Volume confirmation: The upward volume has been strong, confirming price movements. EXR achieved a new 100-day high in the Up-Down volume ratio when it broke short-term resistance.
- Future challenges: There is still resistance around the $164-$170 price level, where recent peaks have occurred, which might challenge further gains.
Bottom Line
Since the start of the month, large tech stocks have been leading the market. However, there's a negative divergence between the S&P 500 and overall market breadth, meaning most stocks are declining while the market is going up.
Small-cap stocks have continued to perform poorly, signaling an unhealthy market. Normally, we would expect these smaller stocks to also do well if the market was truly healthy. This has not been the case, as small caps are flat while large caps are up around 10% this year.
While the Real Estate sector remains weak, some small-cap real estate stocks are showing signs of turning things around.
The real takeaway here is that recent market gains are primarily driven by a few large tech companies. If these companies continue to do well, the market will follow. However, if they start to struggle and smaller companies do not pick up the slack, we could see a shaky market ahead. This has yet to happen, but it remains a growing concern.
