It has been all the rage lately in the financial press and among the punditry to discuss how a handful of stocks have been leading an index higher. Usually this index is the S&P 500, a market value weighted index. There is so much to talk about in this narrative. But in general a market value weighted index is designed to have bigger companies do more of the the heavy lifting to move the index higher. This is on purpose and just math.
It has led to the creation of funny acronyms like FANG or FAMG or FAANG to describe the leaders. And for pundits to build concern that if those leaders fail then the index will fall. It has been used to build a case for a lack of breadth. This rhetoric is nothing more than what we have seen since the bottom in the markets in 2009, fear mongering at its best. Data mining will always allow you to find the information you need to support your narrative. But come on, if you are looking to measure breadth why do you look at a market cap weighted index?
Instead you can look at the S&P 500 on an equal weight basis with the ETF, Guggenheim Invest S&P 500 Equal Weight (NYSE:RSP). This is just those same S&P 500 stocks with the same with equal weights to each company stock. When one rises and gets out of line with the others it is sold down to the size to make it equal weight again, and when one is underperforming and falls in weight it is bought. FANG or your favorite other acronym cannot play a role here long term.
What doe this chart show? A steady climb in the index on an equal weight since the market low in early 2016. Momentum remains strong and bullish. There is no disaster story here. And certainly no issue with the breadth. Steady as she goes, higher in the channel.
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