I’ve been talking about the large divergence between the mega cap stocks and the rest of the market for subscribers for a few weeks. The last time I have seen small to big ratios like this were at the bottom of the 2008 & 2020 crash – the BOTTOM !
And here we are with this long drawn out sideways pattern. Volatile, but sideways. It appears to be narrowing and I expect it to breakout this summer.
What is the difference between 2008 & 2020 with today? The past events were part liquidity events or liquidity crisis. Today, the Federal Reserve has created all sorts of tools to keep the money flowing to the market makers and banks so liquidity does not stop flowing… good or bad.
I am not saying the Fed is supporting the SP500, I think they are okay with it resetting. But another divergence is preventing it. The Bank of Japan opened up its monetary spigots last October and can not turn them off. Why? The are trying desperately to hold their interest rates at 0.50% even as their inflation surges above 5% with food inflation over 10%. I see a dam that may break soon.
So while the Federal Reserve has raised rates to 5.25% and is now talking of going higher… not lower as the stock market has priced in, the divergence in monetary policy is pulling things apart. But the stock market will be the last to find out.
Or will it?
Here is the bottom line. The only part of the US stock market moving higher are the mega caps – big tech and amazon, etc. Take out 12 companies and the market looks weak. Not falling hard, just very weak.
Here is a simple look at the market internals on a chart that starts at the beginning of 2023. The black plot holds the largest 50 SP500 companies by value – it is up over 20%. The blue plot is the other 450 SP500 companies in effect…the equal weight SP500 which does include the top 50 but only gives them a 10% weight instead of their 50% weight by value. So you have to subtract 2% from the blue plot to take the top 50 out of the blue plot.
So while the mega caps are up over 20% the rest of the SP500 is down a couple of percent year-to-date. If you hold the SP500 fund (C fund), it has split the difference and is up about 10%.
The red plot is the non-sp500 (TSP S fund) which holds the other 3400ish companies in the US stock market. It’s up around 4% for the year.
I highlighted the last 2 trading days in green. The boxes show how much each fund moved. The top 50 surged 4% while the bottom 450 moved less than 1% higher. The divergence widened significantly.
In the first chart we see today’s divergence is looking like a crash without the crash. And I wonder how this plays out in the following weeks.
If the mega caps are the only game in town today, what happens if they pull back. What will make them pull back or decline?
Their last decline coincided with the US dollar surging. Might the dollar surge again? What happens when Japan is forced to decide between runaway inflation or raising interest rates which they can not afford.
While the market is pricing in lower interest rates later in the year, the Federal Reserve is talking the other way – higher rates or holding well into 2024. And if you have not noticed, mortgage rates about back above 7%… probably anticipating higher Treasury rates once the debt ceiling is raised again. We’ll talk more on that in our market commentary later.
I just wanted to get the word out that market internals are awful so don’t get caught up in just the good news as it is presented in the financial media. A lot of smart investors are getting real nervous and playing it safe. You might want to join them.
You should join us at TSP Smart to follow along. It’s getting interesting.
Categories: TSP Charts