Earned.  Stocks extended their rally yesterday as earnings are proving that the recovery is real. Cryptos got a rise after being praised by Elon Musk and other crypto fans.


Beneath the surface.  Ok, so that was a refreshing two sessions after Monday’s nail-biter of a pullback.  Just when we thought the recovery was over and the market was ready to punish our bullish aspirations… bam… stocks bounced, and the rally is back on. Or is it?  Many of us rely on stock indexes to judge the health of… well stocks.  The S&P is up, stocks are up… good for stocks.  And, um, vice versa.  While at a very high level, that way of looking at things is not completely wrong, but you might be missing a few cues if you don’t dig in just a little further. So let’s do that and find out what we can find out.

Remember that the S&P500 is capitalization-weighted index, meaning that stocks within the index are weighted based on their relative market caps.  In essence, larger cap stocks have a bigger influence on the index’s movement than smaller stocks.  I like to refer to the S&P500 as an exclusive winners club.  Getting a large market cap can only happen in 1 way – your stock has to go up… a lot.  Never mind how it happened, the fact that a company’s stock has gone up enough to make it onto a list of the 500 largest companies is a noteworthy achievement.  To make it to the top of that index is an altogether different type of accomplishment.  The top 5 elite of the elite is Apple, Microsoft, Amazon, Facebook, and Google. They alone make up about 20% of the index’s weighting, and they deserve it, because they are good companies and historically, their stocks rose with their successes. Ok, so we now know that if those elite stocks are going up, the index that we often refer to simply as stocks goes up.  Looking down the top 20 of the S&P500, one will note that half of them are technology growth stocks.  There are just 2 banks, 1 industrial conglomerate (Berkshire Hathaway), 1 communications company, 1 healthcare service company, 1 household products company, and 1 retail company. You see where I am going with this?  Big movements in growth stocks will inevitably yield big moves in the S&P500 index.  Now don’t get me wrong, there are still 480 very fine stocks in the index across all sectors, and a collective move by them can also move the market.

An interesting, and perhaps, better representation of stocks is the Equal Weighted S&P500, which, as its name implies, weights all 500 elite companies the same.  So Apple, the now-king of the regular S&P500 is weighted equally with News Corporation, which is the smallest weighting in the regular S&P500. So let’s compare and see what we can find.  For the year 2020, the S&P500 gained +16.26% while the EW S&P500 rose by a still-impressive-but-lower +10.47%. What this tells us is that, at a high level, large cap growth stocks did well last year.  That makes sense as those were the go to stocks when the economy was on its knees in the early stages of the pandemic.  Guess what happens in 2021?   Through June 30th the S&P500 rose by +14.41% while the EW S&P500 earned +18.19%, handily passing its sibling.  Things changed a bit, as one might suspect as financials, energy, consumer discretionary, and industrial stocks enjoyed a resurgence in what everyone refers to these days as the recovery trade.  Moving forward into July… the current month… we have witnessed a bit of turbulence.  Through the 15th, the EW S&P500 was down by a hair while the regular S&P500 was up by +1.52%.  When we throw in Monday’s pullback and the last 2 days of recovery, the EW S&P500 is up by +0.05 month to date while the S&P500 is up by +1.42%.  This can be interpreted as another change in market dynamics.  At a high level, this month’s gains are being held up by the familiar large technology growth stocks and not the recovery trade stocks of the prior 6 months.

One last thing on that very basic interpretation.  We can also look at market breadth to determine the trend strength of an index’s underlying stocks.  In the case of the S&P500, 50% of its members are trading above their 50 day moving average.  That is a very simple, down, and dirty way of saying that only half of the S&P500 stocks are in a positive trend position today.  If we look at the more industrial-heavy Dow Jones Index, that number is 67% while the tech-heavy Nasdaq Composite boasts only 33% of its 3,376 members above their 50 day moving averages.  So if you are wondering whether the so-called recovery trade is over, you can see that the answer, despite recent moves in growth stocks, is probably not yet.


Stocks enjoyed another positive session yesterday as strong earnings gave bulls a chance to cheer.  The S&P500 climbed by +0.82%, the Dow Jones Industrial Average rose by +0.82%, the Nasdaq Composite Index added +0.92%, and the Russell 2000 Index jumped by +1.82%.  Bonds slipped once again and 10-year treasury yields climbed by +6 basis points to 1.28%.  Cryptos jumped by +6.74% as they got a boost from positive comments by fanboys Cathy Wood, Elon Musk, and Jack Dorsey of Square and Twitter fame.


– Initial Jobless Claims (July 17) is expected to come in at 350k, down from last week’s 360k claims.

– Leading Economic Index (June) may have risen by +0.8% after rising by +1.3% in May.

– Existing Home Sales (June) is expected to have risen by +1.7% after falling by -0.9% in the prior month.

– This morning Alaska Air, Danaher, Dow, DR Horton, AT&T, American Electric Power, American Airlines, Newmont, Blackstone, Crocs, Abbott Labs, and Dominos beat while Southwest missed.  SVBF Financial, Intel, Boston Beer, Twitter, and Snap will release earnings after the bell.


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