Whenever there is action in the equal weight vs cap weight relationship, my inbox gets flooded with bad takes.
The truth is, whatever it is– it’s not that important, and it’s definitely not bearish.
All it really means is that the biggest stocks are outperforming most stocks.
When you think about it, it’s normal. It’s actually the case most of the time, by definition.
It is how the biggest stocks become the biggest stocks, right? By outperforming the market consistently over time...
So here’s another, and maybe better way to view the relationship. In the blue line, we’re removing the equal-weighted side of the equation to show that it’s not about that.
This relationship is about the biggest and best stocks.
The more cap-weighted– or higher the concentration, the better the performance.
The Vanguard Mega Cap Fund has 65% of holdings in the top 10 stocks. The S&P 500 has 38%, and the Invesco Equal Weight Fund has 2.75%. That’s a very different mix.
As such, the mega cap growth index is beating the cap-weighted S&P in the same way the S&P is beating its equal-weighted counterpart. And notice how this is true over the longest timeframes.
So these ratios rising, and favoring increasingly concentrated indexes, isn’t suggesting you should sell all your stocks because breadth is bad… It's just saying that the best stocks over the long term are also the best stocks over the short term.
It’s not always the case, and it doesn’t have to be true for it to be a healthy bull market.
I don’t think too much about what this ratio will do in the future, because it doesn’t matter to me.
But I think that its recent performance says more about the strength and power of the market’s top stocks and less about the broader market.
At the end of the day, it’s a cap-weighted world, and it’s tough to beat big-cap tech.
That’s the real story about the underperformance from equal-weight indexes.
We discussed China’s best players on the Morning Show with Barron’s writer Paul La Monica today. Did you know they have a similar basket to the Magnificent Seven?
We cover themes like this regularly for All Star Charts premium members. Read our recent deep dive on China here.
We’ve also been buying calls in China’s big-cap tech leaders via our Breakout Multiplier strategy. Click here to sign up risk-free.
