By traditional measures, the stock market is having a very good year. The S&P 500 is up 17.75%. The Nasdaq is up a whopping 35.78%. If those gains held, this would be the seventh-best year for the S&P and the fifth-best year for the Nasdaq since the turn of the century.
But it doesn’t feel like it’s been a great year for the market. Or even a particularly good one. Thanks to the so-called Magnificent 7 stocks (Amazon (AMZN), Apple (AAPL), Google (GOOG), Meta (FB), Microsoft (MSFT), Nvidia (NVDA), Tesla (TSLA)), in 2023, the major indexes have been downright deceiving – perhaps more so than at any point in history. The better gauge or what’s actually happening in the market is the S&P Equal Weight Index.
As its name suggests, that index gives equal weight to all large-cap stocks, and thus isn’t overly influenced by its largest positions. And it’s up a mere 2.6%. Now that feels more like what’s been actually happening with stocks this year.
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But here’s the good news: The Equal Weight Index is on the cusp of flashing a big green “Buy” signal. Namely, it’s on the edge of reclaiming its 200-day moving average for the first time in two months, after dipping below it in mid-September (see chart).
As you can see, the last time the index broke decisively above its 200-day line was in early June – just as the market was embarking on a two-month rally in which it advanced nearly 10% in June and July. The S&P Equal Weight Index also burst above the 200-day line in January – another time this year when the S&P 500 advanced nearly 10%, though it coughed up virtually all those gains in February and early March. Prior to that, the Equal Weight Index hadn’t been firmly above its 200-day line since April 2022.
In both those occurrences, the run-up in the Equal Weight Index trailed the rally in the S&P 500 by about a week, and didn’t break above its 200-day line until close to two weeks later. With this new rally in the S&P 500 approaching three weeks, getting “confirmation” from the Equal Weight Index breaking above its 200-day line would be a bullish signal, and – if form holds – would likely portend an extended rally that lasts well into December, perhaps through year’s end.
What happens beyond that – i.e. as we enter 2024 – is anybody’s guess. But by paying attention to the 200-day line in the S&P Equal Weight Index, you’ll be able to decipher whether this rally has staying power. Consider: From July 2020 through February 2022, the index never dipped below the 200-day line. During those 18 months, the S&P 500 rose by as much as 50%.
And that’s the easiest way to tell the difference between real market rallies and this year’s mega-cap-inflated double-digit gains: During a bona fide market rally like the one we experienced in 2020 and 2021 after the early-Covid flash crash, all (or most) stocks participate, as evidenced by the huge gains in the Equal Weight Index during that time. In thin, hollow run-ups like what we’ve experienced most of this year – with the notable exceptions of January and June/July – participation is low, and that index doesn’t budge much.
The good news? It’s starting to budge, and by the time you read this, the Equal Weight Index may well have broken above its 200-day moving average for the first time in two months. If it does, and if it stays above it for more than a few days, then I think we can confidently say this is the rally we’ve been waiting for since mid-summer, and not another false start.
I believe this rally is the real deal, and not just a Magnificent 7-induced mirage. Why? Because eight of the 20 stocks in my Cabot Stock of the Week portfolio are currently hitting either 52-week highs or all-time highs – easily the most since at least July. If you want to know the names of those stocks – hand-picked every week from among Cabot’s best growth, early-stage, global, dividend and value investing newsletters – simply click here.
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