Record Year for the Few, Not the Many

The world’s benchmark stock index is the S&P 500 Index. Its current market value is $36 trillion. However, the top cadre of just 7 stocks are worth $12 trillion, comprising a third of the Index. While there are numerous winners among the other 493 stocks, there are a record number of underperformers relative to the Index’s 24% gain so far this year. Two-thirds of money managers failed to keep pace. There has never been a year in modern history (if ever) where so many stocks have faltered in comparison to their benchmark due to the 50 to 240% gains among these very exclusive 7 stocks in the trillion-dollar club (ranging from $850 billion to $3.1 trillion valuations). The years of extreme under performance by the ‘many’ tend to occur near market peaks, while lower levels of underperformance occur at Bear market bottoms (2009, 2016 and 2022). We expect the extreme underperformance to shrink in 2024 as market breadth improves, but we are not betting on a major Bear market decline anytime soon due to the early-stage AI boom and secular trends of a tight labor market.

The power behind this Bull market has been narrow until recently, but with interest rates falling sharply in the final 2 months of this year, the rally has become inclusive among most sectors, except for energy. The number of stocks above their 50-day moving average is quite extreme, but this often happens in the early to middle stages of a Bull market, rarely at the end. A month-long correction may be in our future, starting in Q1, 2024, but historically these momentum peaks improve the odds for investors to buy dips.

As with the previous chart, we see below that another momentum measure is at overbought extremes. It has been over 3 years since the Relative Strength Index reached this level. A pullback is coming, but we should focus less on selling the peak and more on buying the decline. Over the past 8 weeks there has not been a 2-day correction and no decline of even 2%. Like 2017, this has made it exceedingly difficult for managers to add stocks that are running higher without a pause. The good news comes from who report that the S&P 500 equal-weight index just round tripped from a one year low to a one year high in just 33 days. The last time that occurred was 41 years ago in the first two months of a roaring 5-year Bull market. The market is closer to short term pain, as it continues to accumulate longer term gains.

Option traders are overweight upside call options, money managers have a very elevated 80% equity exposure and the CNN fear gauge at 80 is fast approaching the 83+ extremes that often signal peak prices. There are plenty of reasons to temper new stock purchases with such overbought indications, but it may take more time or an exogenous news event to trigger a deep decline before early January as the buying power remains strong and FOMO is building. While traders can raise some cash in early January, investors with sideline cash should maintain long positions with an increasingly diversified portfolio that includes laggards in the healthcare, communications, utility, and energy sectors. We have clearly had too much cash awaiting the Godot pullback into mid-December, despite maintaining a forecast in the March SP of 4850 – 70 by early January. The next corrective period is due before mid-January as the technical indicators are warning of an overdue pause. The next cycle low expected for significant equity accumulation is due next March. Consumer credit and business stress measures remain healthy while interest rates decline, thus earnings per share and multiples should continue to grow in 2024 and feed the Bull.


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