It’s Only Five (or Seven or Eight) Stocks… By, D.R. Barton, Jr.

Barton TT1There have always been certain times when a group of stocks were pulling the rest of the market along. A quick search shows that the term FANG was first used by none other than Mad Money host Jim Cramer in 2013 as an acronym for Facebook, Amazon, Netflix, and Google. Two of them have changed names since then and Apple stock was added soon thereafter to make them the FAANG stocks. After a re-ascent to the top echelon, Microsoft was rightfully added in to give us the FANGMA group.

To anyone who just woke up from a Rip Van Winkle-like sleep over the last 10 years, it would seem that not a lot has changed. The truly biggest of the big market capitalization stocks have been the talk of financial media this year as well. Stir in Artificial Intelligence (AI) darling Nvidia, and electric vehicle maker Tesla, and you wind up with the companies that make up today’s version of the mega cap stocks. We could call it the Magnificent Seven if you’d like to penalize NFLX for dropping to the 37th largest market cap stock in the S&P 500 and leave it out.

But this rambling on about the stocks that everyone is already talking about is being done for a reason. They have largely been the stocks leading the market from the October 2022 lows to the new bull market. And many have written off this bull with the cry that forms today’s article title, “It’s Only Five (or Seven or Eight) Stocks…”. As in, the market drive higher has been really an advance by only a handful of stocks. And in fairness, three of the top four performing stocks in the S&P 500 are part of this Magnificent Seven:

1163 DR Chart1 2

As we can see, all three mega-cap stocks had incredible triple-digit returns throughout less than seven months. But the interesting development is that the rest of the market is catching up. Let’s look at two charts that show improving breadth…

Playing Catch Up

Let’s first look at one of my favorite breadth indicators—the cumulative breadth chart. As a quick reminder, cumulative breadth is a simple calculation: Each day, the New York Stock Exchange (NYSE) reports an “advance-decline” number, which is simply the number of stocks that closed higher today than yesterday minus the number of stocks that closed lower. Many also call this number, simply, “market breadth.” If you add those sequential daily breadth or advance-decline numbers together, you get a cumulative number. And that’s one that charted in the top line of the chart below, with the bottom line being the traditional S&P 500 index:

1163 DR Chart2

Let’s look at what’s propelling that broad participation in the current move up. We’ll view a comparison of the standard S&P 500 index to the Equal-weighted S&P 500. The standard index is weighted by market capitalization and is currently at a historically extreme level of top-heaviness.

This chart shows the Equal Weight S&P 500 on the top and the Equal Weight, divided by the standard S&P 500, on the bottom:

1163 DR Chart3 1

While breadth is improving, it will be interesting to see how the Fed’s rhetoric and the rest of earnings seasons impact the markets advance.

What do you think investors and traders have to keep their eyes on? I’d love to hear your thoughts or comments. Send them to me using drbarton “at”

Great Trading and God bless you,

D.R. Barton, Jr.

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