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There is no doubt every stock market rally needs leaders, and the current bull market has clearly been led by technology stocks. Superstars like Amazon.com Inc. (Nasdaq: AMZN) emerged to drive the rally higher, but together these stocks now account for the lion's share of the market's growth.
At least, that's what the public perception dictates...
On a valuation basis, the leading group, called the FAANGs or FANGMAs (depending on which members are included), are responsible for just about the entire gain year to date. How can that be? The math allows for some groups to gain while others lose. Let those groups all cancel each other out, and the stock market still has a 5.4% gain in 2018, thanks to the FANGMAs.
It follows that if we take the FANGMAs out, the market would be flat or slightly lower for the year so far.
The media loves to point this out. The problem is it's not exactly true.
It's true that the big stocks got much bigger. However, they are not the only stocks in bull markets. How else can we explain why the Russell 2000 index of small stocks hit an all-time high in June and stayed there for most of July?
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The question investors should ask then becomes, "Is the S&P 500, with its oversized reliance on just a few stocks, the best way to view the market?"
The Better Way to Track the Stock Market in 2018
In his recent analysis, Money Morning Technical Trading Specialist D.R. Barton, Jr., showed that it's a myth that the market is being led by just the FANGMA stocks.
It's true the capitalization-weighted S&P 500 does depend on its bigger members. However, Barton pointed out that the S&P 500 also comes in an "equal-weighted" flavor, where all 500 companies in the index get equal treatment. The giant Amazon, which has undue influence over the "regular" index, is no more important than the smallest member.
Don't forget, even the smallest stocks in the index are still among the largest 500 in the U.S. market, so small is not really that small.
The "classic" S&P 500 is up 5.1% through last week's close, while the S&P 500 Equal Weight Index is up 3.3%.
To be sure, the classic index beat the equal-weighted index, but if it were only due to the FANGMAs, the difference would be starker.
"If the FANGMAs, the "Big Tech" mega caps, were really doing all the heavy lifting, we'd see the S&P 500 Equal Weight Index faltering - significantly," Barton said.
And based on this often-overlooked indicator, Barton believes the stock market still has plenty of room to run higher in 2018.
Here's his outlook...