US Stocks Near Record Highs, but Sector Data Point to More Fragility Than Meets the Eye
The S&P 500 and the Nasdaq 100 are trading close to their highest price level in 5 years. Our scoring system, however, shows a market that is more fragile than prices suggest. Only 2 of the 11 S&P 500 sectors currently have a health score above 50. At the end of July there were 8. Over the same period, the top spot in the sector ranking has changed hands four times. This marks a reversal from the first half of the year, when the equal-weight version of the index, in which every company carries the same weight, returned 12.1%, compared with 10.2% for the traditional index. This analysis describes the two defining features of today’s market and looks for their causes.
Two Different Stories in the Same Market
The health score is the 0-to-100 score our system uses to measure the condition of an asset. It combines the underlying trend, the strength of the recent move and volatility. Above 50 the condition is favourable, below 50 it is unfavourable.
As of September 22, the S&P 500 has a health score of 60.5 and the Nasdaq 100 of 64.2. The average of the 11 S&P 500 sectors stands at just 44.4.
The explanation lies in how the indices are built. The S&P 500 and the Nasdaq 100 are market-cap weighted. This means each company counts in proportion to its stock market value. A few large companies can therefore hold up the index even when most of the market is weakening.
Indices in which large companies carry less weight confirm this. The Dow Jones has a health score of 42.0, and the Russell 2000, which tracks small-cap companies, has a score of 46.3.
The deterioration across sectors has been rapid. On July 24 the average was 53.7 and 8 sectors were above 50. Today the average is 44.4 and only 2 sectors are above 50.
Some readings are extreme.
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