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SP500 surges while the market falls. What’s really happening with the US stock market?

Trading terminals are shining in red colours and talks on upcoming correction is coming from every corner. But at the same time, the SP500 index is hitting all-time highs every week. Thanks to such tremendous growth, one might think that the market is healthy, but is it so?

US broad market vs SP500 index

Let’s take a look at the Wilshire 5000 Total Market index — is a market-capitalization-weighted index of the market value of all American stocks actively traded in the United States

The dynamics of the percentage growth of the Wilshire 5000 and S&P 500 indices looks quite natural (Wilshire 5000 — blue line, S&P 500 — red).

Wilshire 5000 and SP500 indecies

shire 5000 and SP500 indecies

However, we know that the S&P 500 is also included in the Wilshire 5000. Consider the ratio of these indices, that is, divide the Wilshire 5000 by the S&P 500.

From March 2020 to the end of February 2021, an upward spread dynamics was observed. This suggests that the market was dominated by a high-risk appetite, which is understandable against the background of unprecedented stimulus measures by the FED. The overwhelming majority of securities of the entire stock market had growing dynamics.

But since March 2021, this spread has been inverted (red line with a downward slope). The S&P 500 grew faster than the Wilshire 5000 and was the driver for the stock market growth: amid inflation statistics and rhetoric about the upcoming phasing out of stimulus, risk appetite was declining.

Wilshire 5000 and S&P 500 index ratio

Wilshire 5000 and S&P 500 index ratio

Amount of growing vs the amount of declining 

Now let’s look at the Advance/Decline Index Market Width indicator (growth/decline indicator). It represents the cumulative difference between the number of rising and falling stocks within a given index.

Advance/Decline Index 

  • Increasing A/D helps to confirm the bull market and identifies the power of the growth.
  • Declining A/D helps to confirm the bear market and indicate the weakness. 
  • Growing stock marekt with declining A/D is a bearish divergence and indicates the diminishing power of growth, as fewer stocks are driving the market. 

Consider this indicator on NASDAQ, AMEX and NYSE and find out what was the dynamics of all securities on these exchanges. The Advance/Decline Index trend line is green and compares to the S&P 500 trend.

NASDAQ A/D indicator

NASDAQ A/D indicator

AMEX A/D indicator

AMEX A/D indicator

NYSE A/D indicator

NYSE A/D indicator

The charts clearly show that there has been a growing divergence between the A/D indicator and the S&P 500 since February-March 2021. Against the background of the S&P 500 rally, we see an increase in the number of declining stocks.

What is actually growing: SP500 or FAANG?

Now let’s look inside the S&P 500 itself. According to the chart, against the background of the all-time high of the index, only 16% of securities are at 52-week highs. The growth of the S&P 500 was facilitated only by a few large companies with a large weight in the index — such as Tesla, Alphabet, and others.

What is actually growing: SP500 or FAANG?

Conclusion

The record rally in the S&P 500 index does not mean the growth of the entire US stock market. There is a clear risk aversion for investors, a flow of assets from risky securities to blue chips, which explains the historical growth of the major American index.