October started off strong for the market with the S&P 500 reaching new highs and the RSI moving up to 60—a bullish sign for investors. Those gains were given back last week when three measures of inflation came in hotter than expected, raising concerns about a potential rate increase by the Federal Reserve. This week also started off strong until optimism around the AI trade faded as industry leaders like Nvidia's CEO said that higher borrowing rates are impeding sustained growth in technology.
One concern that investors have is the overconcentration of technology in the S&P 500—with stocks like Nvidia, Apple, Microsoft, Alphabet (Google), and Amazon making up 30% of the entire index. The effects are visible when comparing the capitalization-weighted index, SPY, to the equal-weighted RSP, which dropped by 3% through September while the SPY stayed relatively flat.
Looking at the comparative trend of the index members also demonstrates signs of overconcentration in technology. Through mid-September, the number of stocks in the S&P 500 trading above their 200-day moving average fell from 65% to 42%, indicating that a growing share of names in the index were in a downtrend. Meanwhile, the SPY continued to grow—furthering concerns of overconcentration. Looking at the data, the last time this ratio fell below 50, both the SPY and RSP were entering a bear market. That didn't happen this time, which can be explained by looking at the recent headwinds affecting smaller members in the S&P 500.
The catalysts that pushed many stocks below their 200-day moving averages were high yields and energy. As we mentioned in a previous market update, real estate and utility stocks suffered as higher bond yields eroded their dividend income value. Volatile energy markets and higher gas and diesel prices have hurt fuel-dependent companies such as airlines and transportation stocks. Since September, shares of the trucking company J.B. Hunt fell by nearly 12% as higher diesel prices have worn on their business.
Given the extreme circumstances we've seen over the past few weeks, the divergence between the equal-weighted and cap-weighted S&P 500 is more understandable. While technology stocks have been hurt by waning enthusiasm for AI, that could change as more earnings are reported in the coming weeks.
This material is for informational purposes only and is not intended as investment, tax, or legal advice. Past performance is not indicative of future results.
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