As we approach the end of 2024, the disparity between the S&P 500 and its equal-weighted counterpart has become increasingly pronounced.
This divergence raises questions about the market’s underlying health and the sustainability of its current trajectory.
This week, the S&P 500 experienced significant volatility. On Wednesday, the index fell by 2.9%, marking its second-worst loss of the year, following the Federal Reserve’s indication of fewer interest rate cuts in 2025 than previously anticipated.
The Dow dropped over 1,100 points, and the Nasdaq fell 3.6%.
In contrast, the RSP has shown a different pattern. While the SPY had been buoyed by large-cap Magnificent Seven tech stocks, the equal-weighted index reflects a broader market performance, which has been less robust.
This is a critical thing traders can watch to better gauge broad market strength.
This discrepancy suggests that the market’s strength is concentrated in a few high-performing stocks rather than being widespread across all sectors.
The resilience of the S&P 500 can be largely attributed to the performance of mega-cap stocks, particularly those in the technology sector. Companies like Apple (AAPL), Google parent Alphabet (GOOGL), and Microsoft (MSFT) — three of the Magnificent Seven — have played pivotal roles in sustaining the index’s levels.
Their substantial market capitalizations mean that their stock movements significantly influence the cap-weighted SPY, often masking weaknesses in smaller-cap stocks.
Implications for Investors
The growing gap between the SPY and RSP indicates a market heavily reliant on a select group of high-performing companies. This concentration poses potential risks, as any downturn in these key stocks could disproportionately impact the broader market.
Hence the market’s nasty dip this week.
Investors should exercise caution, recognizing that the apparent strength of the S&P 500 may not reflect the overall market’s health. Diversification remains crucial, and reliance on cap-weighted indices might obscure underlying vulnerabilities.
As we transition into 2025, monitoring the performance of both the cap-weighted and equal-weighted indices will be essential. A continued divergence could signal increasing market concentration, while a convergence might suggest a broadening of market strength.
So while the S&P 500’s performance may appear robust, a deeper analysis reveals a market supported by a narrow segment of high-cap stocks.
Just look at SPY’s year-to-date performance vs. RSP’s: It’s a 23% gain vs. 11%, respectively.
Investors should remain vigilant and consider the broader market context when making investment decisions.
Kane Shieh
Kane Shieh Trading
Follow along and join the conversation for real-time analysis, trade ideas, market insights and more!
- Telegram: https://t.me/+Ji2OakXnGMM5OTI5
- YouTube: https://www.youtube.com/@GammaPockets/featured
Important Note: No one from The TradingPub team or Kane Shieh Trading will ever contact you directly on Telegram.
*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.
P.S. My Top 2 Tickers for a Potential Santa Rally
Since it’s almost Christmas, which means the potential for a Santa Claus rally, I’m in a giving mood…
So I want to give you the chance to see how to unlock BIG gains with my TOP TWO tickers for the Santa Claus Rally at 2:30 p.m. ET today, Dec. 20!
I can’t guarantee results or against losses, but to go along with the two tickers, I’ll also reveal the corresponding strike prices that could make all the difference this holiday season.
It’s not just about whether there will be gains this season, but how impactful they’ll be…