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...
The Technicals Show More Gains Ahead for the Stock Market
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Driving home the point that the whole market is strong (and not just the FANGMAs) is the NYSE advance-decline line.
Its strength could not be clearer.
The advance-decline line is a market-breadth statistic that keeps a running total of NYSE stocks that go up each day minus stocks that go down. When its value rises over time, it tells us that the majority of stocks are going up.
Despite the poor performances from the tech giants last week, the NYSE advance-decline line hit a fresh record high. Put another way, the market survived a very turbulent week for the FANGMAs with flying colors.
It's a decidedly bullish development - one that leads Barton to maintain a bullish bias toward quality stocks hit by pullbacks of any kind.
Earlier in July, the classic S&P 500 punched through a very critical price level at 2,800. This represented the highest price the index reached since its February swoon, and in technical terms, it was an upside breakout.
What it means is that buyers decided the 2,800 level was no longer a place to take profits and was now a place of value. What was expensive was now thought to be cheap.
This still remains an important level to watch, especially since last week's decline brought the S&P 500 back down near it. Giving the market a little margin for error, the buyers should see this as another chance to get in before the next sustainable rally.
With the underlying strength in market breadth, this is a good bet. It may not ricochet higher after touching 2,800, but there is little evidence to suggest anything sinister lurking out there at this time to drive the market much lower.
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