Narrowing Market Leadership

Narrowing Market Leadership

Posted on December 07, 2021
The markets continue to fluctuate, in both directions, following the spike in volatility that occurred the Friday after Thanksgiving.   Over the course of the last 7 trading days (Monday included), all but one have fluctuated more than +/-1.00%. As Canterbury wrote last week, ďthe market [could] experience a few more outlier days, in both directions, until it determines where it wants to go.Ē  So far, that has been the case.

If you look at the individual stocks of the S&P 500 through last Fridayís close and compared each stock to its highest point over the last year, the average S&P 500 stock was off its 1-year high by almost -13%.  It should be noted that stocks do not put in highs/lows on the same days, so one stock may have put in its 1-year high last week, while another one put in a 1-year high 6 months ago.  The point here is that the market is not that far off its high, while the average S&P 500 stock has a current drawdown of more than -10%. 

Here is the Bottom Line of this market update:
We know that the markets are heavily concentrated in a small number of stocks, most technology related.  These stocks, although small in number, have a major impact on the S&P 500.  When we look at the performance of the heaviest-weighted stocks in each market sector, we find that as a whole, the biggest stocks are outperforming the smaller ones by a considerable margin and overstating the strength of market indexes.

Letís start by identifying the names of the largest S&P 500 stocks.  The table below shows the largest 3 stocks within each market sector.

Source: Holdings pulled from SPY (State Street SPDR S&P 500 ETF)

Now that we have identified the largest 3 components of each sector, letís compare the weights of each sectorís largest 3 securities versus the weight of the remaining stocks in each sector:

Source: Canterbury Investment Management, using holding percentages of SPY (State Street S&P 500 ETF).

Looking at the chart above, here are a few summary points:
  • There are 504 stocks in the S&P 500 (some stocks, like Google, have 2 share classes).  42% of the stock marketís movement comes from just 33 stocks (the largest 3 stocks in each sector).  Thatís 6.5% of the marketís components accounting for 42% of the marketís movement.
  • The largest 3 stocks in the three tech-related sectors, which are information technology, discretionary (which include Amazon/Tesla as heavy components that are tech-related), and communications-- make up 28.5% of the marketís movement (9 stocks accounting for 28.5% of the marketís movement).
  • The three largest stocks in information technology (75 total stocks), discretionary (56 total stocks), and communications (27 total stocks) account for more than half of that sectorís movement!  So, across those three sectors, 9 total stocks (out of 158) attribute more than half the movement of those sectors.
  • This will be important in a minute, but Apple and Microsoft make up 44% of information technology; Amazon and Tesla make up 57% of discretionary; and Google single-handedly accounts for 42% of communications.
Now, letís go back to our original stat discussed earlier, which was that the average S&P 500 stock was off its 1-year high by -13%.  How do the largest 3 stocks in each sector stack up against the rest of the sectorís components?

Source: Canterbury Investment Management.  Stock data pulled from Yahoo Finance using Amibroker.  Closing data as of 12-3-2021

Looking at the chart above, here are a few summary points:
  • In ever single sector, the largest 3 stocks on average have a lower decline of their peak value than the average smaller stock in their sector.
  • The average communication stock is substantially off of its 1-year high.  Most of these declines have occurred in the last few months.  Google, the largest communications stock, however, is only off its 1-year high by -5%.  The third largest comm stock, Facebook, is off by nearly -20%. 
  • Looking at Consumer Discretionary, Tesla is the 2nd largest stock and off its 1-year high by -17%.  Keep in mind that this -17% drop comes after a substantial, parabolic advance.  Tesla had previously run up 118% since a relative bottom in May. Parabolic advances usually precede fast, sharp declines.  The third largest stock in this sector, Home Depot, recently put in a new high.
Bottom Line
Each sector of the market is being led by its heavier components.  Again, it should be noted that not all stocks put in 1-year highs at the same time, and we are not factoring in how much a stock had run-up prior to falling off its high, but by-and-large, heavier market components have been stronger than smaller ones recently.  When you factor in how big of an impact larger stocks have on todayís market, that becomes an increasing concern.  Market leadership is narrowing, not broadening. 

Technology-related stocks make up nearly half of the S&P 500.  The largest 9 S&P 500 stocks are all tech related.  As these larger stocks go, the markets will followógood or bad. 

For the most part, Canterburyís risk adjusted rankings in the marketís sectors have remained the same for the last month.  The biggest parody is that Information Technology (companies such as Apple, Microsoft, and Nvidia) is leading the way, while Communications stocks (Facebook, Netflix, Google) are at the bottom of our lists.  The once exception is the Utilities sector, which has come from near the bottom of the sectors to now being in the middle of the pack on a risk-adjusted basis.  Canterbury will continue to monitor for any additional changes in risk-adjusted strength.
Canterbury Investment Management: Tom Hardin

More About Tom Hardin

As Chief Investment Officer, Tom has more than 30 years of experience in the investment management industry and has a broad breadth of knowledge. He is known as an innovator, educator and has been revolutionary in the advancements of portfolio and risk management.

Canterbury Investment Management: Tom Hardin

More About Brandon Bischof

Brandon is directly responsible for managing the Canterbury Analytics Group (CAG). To date, Canterbury Analytics Group has played an important role in advancing portfolio management from a loose art form based on subjectivity and obsolete assumptions to an adaptive process with scientific rules and methods capable of providing evidence based results and statistically relevant value add results.

Every effort was used to provide accurate data and mathematical calculations to provide, what we believe to be, accurate results. Canterbury Investment Management, LLC, and its principal owners, make no guarantee of completeness or accuracy of data or calculations as well as conclusions of any statistical data or information contained in the simulation illustrated on this page. Past results or performance is in no way a guarantee of future results.