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Plenty of Meat on The Bone
The S&P 500 ($SPY) closed this week at all-time highs (ATHs), along with the S&P 500 Equal Weight ($RSP). With this strength many will begin to speculate about this being “exhaustive,” and with an election and earnings season coming up, there could be plenty of reason to be “cautious.” The reality is that when you dig below the surface, there is still plenty of meat on the bone for this market rally to continue.
We Don’t Make The Rules
As most of you know, the S&P 500 is a market-cap-weighted index. The more a company’s stock rises, the larger its weighting in the index grows—a form of momentum. Some have pointed out the concentration risk, and while it is a reality, it doesn’t mean it’s a tragedy. We don’t make the rules; we’re simply here to study the market dynamics and use them to our advantage.
Digging Deeper: The “Starters” and the “Bench”
The top 10 stocks in the S&P 500 ($SPY), which I call the “Starters,” make up roughly 34% of the index. These companies have earned their place by generating strong returns and growing their market cap. When they are on the field, the index has a much better chance of winning. Interestingly, none of the “Starters” made an ATH this week, even though the S&P 500 and S&P 500 Equal Weight did. Over the past three months, 6 out of the 10 Starters haven’t even positively contributed to the market’s performance—they’ve been on the bench and are just now stepping back onto the field.
During this time, the “Bench” stocks picked up the slack. Bull markets have a unique way of overcoming investors’ concerns, a phenomenon known as “climbing the wall of worry.” So while market breadth may seem “stretched,” it’s unlikely to have a major impact as the "Starters” begin to re-enter the game. In fact, over the past month, 9 out of 10 “Starters” have shown positive returns—they’re just getting warmed up!
“The Starters”
Why Focus on the “Starters”?
In the coming days, if market breadth begins to correct, some may see this as a reason to panic. However, given the heavy concentration in the S&P 500, it’s important to recognize that this can sometimes create misleading signals—something a doomer backtest might not pick up on. Remember, the bottom 434 stocks in the index weigh about the same as the top 10.
Bull Markets Are Beautiful
It’s a bull market. One of the beauties of bull markets is that they solve problems—both the ones we know about and the ones we didn’t even realize existed. It’s easy to remain “cautious” as we face potential corrections or the looming uncertainties of elections and earnings season. But the market tells a different story. The S&P 500 is at all-time highs, breadth looks great and the “Starters” have yet to fully show their strength. As they return to the field, there’s still plenty of meat on the bone for this rally to continue.
Cheers,
-LT