Four Charts Showing Why It’s No Longer Just a Mega-Cap Story

Posted by Adam Turnquist, CMT, VP Chief Technical Strategist

Friday, July 28, 2023

Key Takeaways:

  • Broadening participation in this year’s rally has changed the narrow leadership narrative.
  • The average stock is doing quite well, evidenced by continued technical progress on the S&P 500 Equal Weight Index.
  • The S&P 500’s advance/decline line has broken out to new 52-week highs after diverging from the broader market this spring. The breakout provides additional confirmation of the S&P 500’s rally to year-to-date highs.
  • The percentage of stocks trading above their 200-day moving average has notably improved this year. Furthermore, the composition of breadth leadership remains heavily tilted toward cyclical stocks.
  • Global stocks are also participating in this rally. The MSCI All Country World Index ex-USA has recently reached a new 52-week high.

A New Chapter

The narrative of this year’s rally has changed as this bull market is no longer just a mega-cap story. A new chapter of broadening participation has developed. Relatively resilient economic data in the U.S., receding inflation pressures, and expectations for the end of the Federal Reserve’s (Fed) rate-hiking campaign have underpinned a notable expansion in market breadth since early June.

The following four charts highlight why this rally is no longer just a mega-cap story.

  • Equal Weights Getting Even

After lagging behind the S&P 500 (SPX) for most of the year, the S&P 500 Equal Weight Index (SPW) kicked back into gear last month and staged an impressive comeback. As the name implies, each stock within the index is equally weighted, unlike the market-cap-weighted SPX. The equal weighting eliminates the distortion of the mega-cap components and significantly changes several sector weightings, including technology, which drops from around 29% on the SPX to only 13% on the SPW. The industrials sector has the biggest increase in weight, jumping from 9% on the SPX to 16% on the SPW.

Technically, the SPW has cleared resistance off the August highs after confirming support off an uptrend. The rising 20-day moving average (dma) is above the rising 50-dma, which is also above the 200-dma (20-dma > 50-dma > 200-dma). This moving average alignment provides additional confirmation of the SPW’s uptrend.

Relative strength is improving for the average stock. The SPW vs. SPX ratio chart recently inflected higher off support from the 2021 lows. While it’s too early to make the call for an uptrend on the ratio chart, the recent higher lows near support provide a constructive sign for the SPW. Furthermore, a pullback or consolidation within the mega-cap space, coupled with a soft landing economic scenario, could serve as a catalyst for a confirmed relative uptrend of SPW outperformance.

View enlarged chart

  • Advancers > Decliners

The chart below shows the two-year cumulative advance-decline (A/D) line for the SPX. The line is calculated by taking the difference between the number of advancing and declining stocks on the index for a given trading day and adding that difference to the prior day’s value. A rising A/D line is indicative of positive market breadth as the number of advancing stocks is outpacing the number of declining stocks, and vice versa for a declining A/D line.

Earlier this spring, the A/D line (bottom panel) was trending lower as the SPX (top panel) continued to climb higher. This negative divergence resulted from narrow participation pushing the broader market higher, a concerning technical sign for the sustainability and strength of the rally. However, the tables have turned as participation in the rally began to broaden last month. As a result, the A/D line reversed course and surpassed resistance from the August 2022 highs. The breakout on the A/D line provides additional confirmation of the SPX’s rally to year-to-date highs.

View enlarged chart

  • From Bad Breadth to Good Breadth

The percentage of stocks on an index trading above their longer-term 200-day moving average (dma) is another important way to quantify and compare market breadth. As a general rule, if a security is trading above its 200-dma, it is considered to be in an uptrend, and vice versa if price is below the 200-dma. Furthermore, the higher the percentage of stocks above their 200-dma implies buying pressure is more widespread—suggesting the market’s advance is likely sustainable.

As shown in the chart below, 73% of stocks within the S&P 500 are trading above their 200-dma as of July 27. This compares to only 48% at the end of 2022. In addition, the composition of breadth leadership has turned increasingly bullish. The highest sector readings include technology, industrials, energy, and consumer discretionary. So not only is breadth on the index robust, but cyclical stocks are also leading.

View enlarged chart

  • Participation is Global

The U.S. equity market is not the only place to find a bull market. Global stocks are also doing relatively well, with several major indices recently hitting new 52-week highs, including the MSCI All Country World Index ex-USA. This index, comprised of over 2,300 constituents, tracks mid and large cap companies operating across 22 of 23 developed markets (excludes the USA) and 24 emerging market countries. As shown below, the index has recently broken out from an ascending triangle formation and registered a new 52-week high.

View enlarged chart


Technical evidence suggests this year’s rally is no longer just a mega-cap story as broadening participation has changed the narrative. The relative performance of the average stock is building, while the market’s A/D line trades at new 52-week highs. Nearly 75% of S&P 500 stocks are back above their 200-dma, with cyclical sectors posting the highest percentages among sector peers. International stocks are also participating in this year’s rally as most major global benchmarks are in bull market territory. Overall, we view the expansion in market breadth as a constructive sign for the sustainability of this bull market.


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