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Cap-Weighted Leadership Is Unhealthy

Below is a reprint of an article written Thursday in the subscriber-only DecisionPoint Alert:

One of the things we keep track of is the performance of the S&P 500 Index (SPY), which is cap-weighted, versus the S&P 500 Equal Weight Index (RSP). In a healthy bull market, the equal-weighted index (tan line) will outperform the cap-weighted index (blue line) because the advance is broadly based. This is demonstrated by the chart below.

As an advance gets closer to a top, participation narrows and the cap-weighted index takes the lead. We are now at that point in the rally, as you can see from the next chart — the leadership shifted months ago. That doesn’t mean that the rally has to end right away, but it will probably end sooner rather than later.

Good Luck & Good Trading,

Carl Swenlin & Erin Swenlin

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