Market Analysis

All Things Being Equal

All things being equal, the 2019 rally stinks. No really. Remember those new all time highs on $SPX and $NDX at the end of April? Fake. Why? Because on an equal weight basis the 2019 rally was the weakest of the last 3 rallies. By far.

Firstly, what is equal weight? Look no further than the $XVG, the value line geometric index.

$XVG tracks the median moves its components using the assumption that each stock has an equal amount (for example, $1,000) invested in them. The daily average moves of stocks are then calculated geometrically (rather than arithmetically). In basic terms, the Value Line Geometric Index eliminates an illusion created by cap-weighted index components. Heavily weighted stocks within a cap-weighted index can pull it higher even as the majority of the stocks within the index are not following along. For example, in a cap-weighted index like the S&P 500, it’s possible for the top 100 weighted stocks to carry the index higher while the remaining 400 stocks lose value. As an investor, it might be helpful to identify when this is happening.

Well it just happened in 2019 and in a big way.

Compare the $XVG readings in 2019 to the readings of 2018 when $SPX made its previous highs:

Didn’t even get close. Which implies that the broader market did not follow some of the big cap names to new highs, hence the recent headlines of new market highs were very deceiving.

And now that $SPX has fallen below the January 2018 highs again this broader market underperformance is very visible.

Big bull market? Where? Negative returns since the January 2018 highs, except select tech:

Why is all this potentially critically important? Well, simply because we’ve seen this movie before.

After all the market highs in the fall of 2007 came in a weakening $XVG:

New highs on weakening equal weight have been the hallmark of major previous tops before (see also 2000) as investors piled into the select winners and ignored the message of the larger market beneath.

But hey, maybe it’s different this time. All things being equal, they don’t appear to be.

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Categories: Market Analysis

24 replies »

  1. Market indexes can be voting machines or weighing machines. Cap weighted indexes are the former while the ValueLine Geometric is the latter.

  2. Thank you for great, objective commentary. Very little of this found anywhere in the blogosphere. WAY too much propaganda out there; the narrative must hold!

    The S&P 500 index has been designated at THE metric for the economic health of the U.S. economy. MUST – at all costs – levitate at all costs to keep confidence high. Well, that works for a while until sentiment and psychology turns negative and the selling begins. Jawboning only works for so long. Recall the crashes of 2000, 2008. It’s not different this time.

    “If you tell a lie big enough and keep repeating it, people will eventually come to believe it. The lie can be maintained only for such time as the State can shield the people from the political, economic and/or military consequences of the lie. It thus becomes vitally important for the State to use all of its powers to repress dissent, for the truth is the mortal enemy of the lie, and thus by extension, the truth is the greatest enemy of the State.” – Joseph Goebbels

    “Blind belief in authority is the greatest enemy of truth.” – Albert Einstein

    “During times of universal deceit, telling the truth becomes a revolutionary act.” – George Orwell

    There are no markets, only manipulated indicies, but at some point price and valuations matter.

    “The four most dangerous words in investing are: ‘this time it’s different.'” – Sir John Templeton

    “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” – Benjamin Graham

    “When it becomes serious, you have to lie”. – Jean-Claude Juncker, then President of the Eurogroup, April 20, 2011

    “When the President does it, that means that it’s not illegal.” – Richard M. Nixon

    Humpty Dumpty sat on a wall,
    Humpty Dumpty had a great fall.
    All the King’s horses, And all the King’s men
    Couldn’t put Humpty together again!


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