Does Tech Really Dominate the Market?

by Options Sensei |

The headlines are filled with talks of tariffs, Russia and rates. Oh, and earnings are about to come gushing through our streaming screens. But what has quietly becoming disconcerting to some of even the verdant bulls (investor sentiment just hit highest level in 5 months) is what seems to be narrowness of the market. Today’s investing advice will explain the dangers of this lack of diversity.

Namely, that the top 5-6 issues, guess who (FAAMNG) account for some 85% to 95% of the market gains this year.

But this stat is misleading, and is strictly a result of the way cap weighted indexes get calculated.

The obvious takeaway here would seem to be that 2018 market returns (around 5% for the S&P and 14% for the Nasdaq 100) are all being driven by a handful of names. And if that handful of stocks ever come back down to earth, which they’ve been wont to do on occasion, then look out below.

The simplest explanation for these staggering numbers is the fact that this is how market capitalization weighted indexes work. By definition, the largest stocks will have a bigger impact on the returns than the smaller stocks.

But when you have the Russell 2000 small cap not only hitting new highs, but actually outperforming the SPX and NDX that shows plenty of other stocks are doing well too.

Indeed, look at how overall NYSE Advance/Decline line tracks SPX. No divergence or thinness here.