When you see the four major US stock market indexes like this, be cautious. Two of the indexes are in a bull trends. The other two are in trading ranges. You must ask yourself, What can we learn from the divergence in the US major indexes?
The majority of the time the indexes move together. Recently the capitalization-weighted S&P 500 and NASDAQ 100 are outliers. Thjey are being driven by only a few large cap stocks in the tech sector.
The immence weighting of the largest companies far out weight the rest of the index. For example: tonight the bottom 465 companies in the S&P 500 Index declare backrupcy and be worthless. Tomorrow the index would be the same value. That is how much the top 35 companies influence the index.
A few of the best preforming money mangers only looked at the top 35 companies in the index. They set aside any in the group likely to under perform and but the remaining few stocks. They outperformed the index in the positive years. But that did not cut the large losses during declining years.
Professionals want to avoid losses. So they focus on any divergence to better understand the underlying market. Currently a few tech stocks have an overwhelming influence on the S&P index.
The following is RSP - the Equal-Weighted S&P 500. Notice that this index looks like the DOW or Russell 2000 above.
What this tells us is the US Economy is not booming like a few tech stocks, but is trading sideways. This same divergence occured in 2000. The tech bubble resulted in a crash in tech that did not effect the rest of the US economy. As you can see from the chart below. 2000 was one of the greatest performance years for most every sector except tech.
But in 2000 the only thing the press talked about was the great losses in Lotus and other tech companies. Despite the fact the PhillipMorris was up 150% and Coal was up even higher. RSP was a big winner in 2000. SPX was a big losser because tech made up 35% of the index, despite only being 5% of the US economy.
Do not get distracted by the noise and miss the signal. Professionals will buy the momentum stocks and watch for a break of Support. They realise this is a short lived anomaly and the outliers will correct back into the herd.
Mastermind members do an End of Week review. This is the best time to expand your analysis. Include other indexes, the international markets, and longer time frames. This give you perspective and allows you to see connections and divergences better.
Remember to follow your rules.
If you want to learn about this and more I have two resources for you:
- Online Course: Trade Like A Pro (TLAP) course. Learn to trade like a Professional at your own pace. Read the testimonials here.
- Group Coaching: Join the Mastermind Group and get the TLAP course for free.
Be well and trade like a pro,
Lloyd
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