Is the US stock market in danger? Performance gap among S&P 500 index equal-weighted stocks reaches a new extreme

According to the Zhitong Finance and Economics APP, last week, as large technology stocks rose while other market stocks lagged behind, the performance gap between the S&P 500 Index and its equal-weighted stocks reached a significant new extreme.

According to data from Dow Jones Market Data Company, since 1990, the performance of the traditional market-cap weighted S&P 500 Index has exceeded the S&P 500 equal-weighted index by 2 percentage points or more for the first time in two consecutive weeks.

However, this is not the only milestone indicating a growing divergence between these two indices. Analysts use these two indices as a rough measure of market breadth.

According to Jonathan Krinsky, Chief Market Technician at BTIG, based on data since 1990, the relative strength index of the S&P 500 Index exceeded 70 on Thursday, while the RSI of the S&P equal-weighted index fell below 50 for the first time. This situation occurred again on Friday.

Krinsky explained that there is a significant gap between these two momentum indicators. RSI is a momentum indicator used by many technical analysts, where a reading above 70 indicates that an index or security is overbought, while a reading below 50 indicates oversold conditions.

These two indicators seem to be moving in different directions, marking the latest sign of divergence in the U.S. market.

Furthermore, the proportion of S&P 500 Index members trading above the 50-day moving average has dropped to below 50%, while the index itself continues to trade above the mid-term average line, with a magnitude exceeding 4%.

Krinsky pointed out that this is a situation that has not occurred since the months leading up to the bursting of the tech bubble in December 1999. For most of the past year, the "poor breadth" of the U.S. stock market has been a widely discussed topic among investment professionals.

However, last week, discussions among analysts about the narrowing market gains seemed to have reached a fever pitch. Many have cited various indicators showing that the divergence beneath the surface of the S&P 500 Index has reached a new extreme, as only a few stocks, mainly NVIDIA (NVDA.US) and Apple (AAPL.US), have been rising recently According to FactSet data, the S&P 500 index hit a historical high for four out of five days last week.

An analyst team from Bespoke Investment Group emphasized on Monday that the S&P 500 index no longer seems to reflect the performance of its ordinary member stocks.

The cumulative advance-decline line of the index last year failed to reach a new high along with the index this year. Instead, the gap between the number of stocks rising and falling in the S&P 500 index actually continued to widen. The number of stocks hitting 52-week lows in the S&P 500 index last week exceeded the number hitting 52-week highs.

Finally, although the S&P 500 index remains firmly in overbought territory, the overbought magnitude in the S&P 500 technology sector is even greater. As a result, the gap between the 50-day moving averages of the two reached its widest level last year.

However, even within the technology sector, recent wide fluctuations have worsened, indicating that the influence of a few super large-cap stocks is increasing. Recently, less than 65% of companies in this sector have stock prices above their 50-day moving averages, far below the level at the beginning of this year