To determine how well the U.S. stock market is doing from day to day, most investors look to a couple of popular indexes.
The Dow Jones Industrial Average, of course, measures the value of 30 equities that are supposed to track economic activity. But most investors pay more attention to the S&P 500, which is more representative of the true breadth of the U.S. economy.
However, the S&P 500 is not comprised of 500 equally weighted stocks. It gives more weight to the largest names, and less to companies with lower market values. So a big move in General Motors (GM) or Apple (AAPL) will shift the index more than a commensurate move in, say, Chipotle Mexican Grille (CMG).
|The RSP should provide some comfort to investors who have been wondering about the health of this bull market.|
But how much more? Truth is, I have no idea. The only traders who know the weightings of the stocks in the S&P 500 use computer programs to measure and arbitrage the impact of individual moves on the overall index. But most investors simply don’t care. They’re trading the index value only, not the value of the component stocks.
This is important, because it leaves the door open to investors who do care about individual names. And it also means that there may be better tools to determine the actual strength of the U.S. stock market.
One of these tools is the Guggenheim S&P 500 Equal Weighted Index ETF (RSP). Unlike the S&P 500, every stock in this fund carries the same weighting. And as you can see in the chart below, it tells a different story than the index we all watch every day.
Over the past year, the RSP is outperforming the S&P 500 by a wide margin. In fact, it’s now making new highs against that benchmark. This tells us that smaller stocks are doing better than larger ones. And it means that the current advance is broad-based, not just the result of strength in the biggest names.
This may not be great news for S&P 500 traders, but it should provide some comfort to investors who have been wondering about the health of this bull market. Of course, we need to remain vigilant for a trend change, which could happen at any time. But for now, the securities in the S&P 500 — and not just the index’s giants — are healthy.