Relative Strength Is Still The Key

Igor Manukhov - Feb 23, 2024
Fewer stocks carry the market. Maybe it is OK after all. Just follow the trend.

Markets continue to march higher and higher. Sentiment is clearly bullish currently. As I mentioned before, I don’t believe that anything will go up in straight line forever, and any rational investor has to expect that the market will take a breather at some point. 
Today I wanted to comment dominance of “the magnificent seven” stocks in US. Of course it would be better if market rallied more uniformly and more companies shared spoils, but this is not new and maybe investors should just roll with the punches. I looked at relative strength between S&P500 equal weight index against a regular S&P500 index history (black line on the top panel of the chart) since 2011 and it appears that stock market can have a long term bull market while few stocks rally. Notice how S&P500 went from less 1500 in 2011 to over 5000 now (red line on the bottom). At the same time, equal weight index underperformed by over 18% over that same period. Maybe there is nothing to it and relationships simply change over time. 

This chart highlights the important of following the trend and focusing on actual relative strength relationships that are happening now. Past correlations could change and could not be reliable anymore. I find over and over again that the relative strength is way more agile and reliable tool to build wealth.

Stick to the trend and avoid all the noise.