Is the Equal Weight S&P 500 About to Get Even?

Adam Turnquist | Chief Technical Strategist

The recent technical progress on the Equal Weight S&P 500 (SPW) has been overshadowed, as only four stocks, including NVIDIA (NVDA), have accounted for more than half of the S&P 500’s total return this year, with NVIDIA alone contributing about one-quarter. As the name implies, each stock on the SPW is equally weighted, as opposed to the market-cap-weighted S&P 500 Index (SPX). The equal weighting eliminates the distortion of the mega cap components and significantly changes several sector weightings, including technology, which drops from around 30% on the SPX to only 13% on the SPW. The industrials sector has the largest increase in weighting, jumping from 9% on the SPX to nearly 16% on the SPW.

The chart below highlights the improving technical setup for the SPW. After a brief consolidation phase following a sizable rally into year end, the index has climbed above resistance from the 2023 highs. The recent breakout from the bullish flag pattern, coupled with positive momentum, suggests a retest of the January 2022 record high of 6,665 is likely.

Equal Weight S&P 500 Approaching Record-High Territory

Line graph depicting the improving technical setup for the Equal Weight S&P 500 suggesting a retest of the January 2022 record high of 6,665 is likely.  

Source: LPL Research, Bloomberg 02/22/24
Disclosures: All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results. 

It’s All Relative

While the SPW is making technical progress in absolute terms, its relative strength compared to the broader market has been underwhelming. The chart below compares both indexes in a ratio chart, used to identify relative trend direction and strength. When the ratio chart is rising, the SPW is outperforming the SPX, and vice versa when it is declining.

Currently, the ratio chart remains in a downtrend but is near a key support level dating to the pandemic-era lows. Furthermore, and as highlighted in the bottom panel, the 52-week rate of change (ROC) for the pair recently dropped to -13%, a historically low level only exceeded in April 1999. Given the stretched rate of change to the downside and the fact that the SPW vs. SPX ratio chart is at a key support level, LPL Research suspects this could be a logical spot for at least a rebound in SPW relative strength.

Equal Weight S&P 500 vs. Market-Cap-Weighted S&P 500

Line graph comparing the Equal Weight S&P 500 to the market-cap-weighted S&P 500 indexes in a ratio chart to identify relative trend direction and strength.

Source: LPL Research, Bloomberg 02/22/24
Disclosures: All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results. 

Summary

A rebound in relative strength for the SPW does not automatically mean the SPX will trade lower, although it would likely come at the expense of mega cap leadership, which may be due for a breather from the heavy lifting these stocks have done for the market over the last year. In addition, technical progress and improving relative strength for the SPW suggest the average S&P 500 stock is doing quite well and that the market is broadening beyond the closely followed mega-caps.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.

Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

Asset Class Disclosures –

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

Bonds are subject to market and interest rate risk if sold prior to maturity.

Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.

Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.

Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

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The fast price swings of commodities will result in significant volatility in an investor’s holdings.

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New Year Strategies for Managing Your Wealth

Chris McCurdy, Managing Director

You work hard for your wealth, and it’s important to make sure your wealth is also working hard for you. Aligning your wealth management partner with your financial goals is crucial to achieving the lifestyle you strive for today, and the legacy you hope to leave. As the new year begins, it is an opportune time to assess your finances and consider where you are in terms of meeting specific milestones and achieving your long-term goals.

Yearlong attention to your wealth management goals should always be a priority. But as 2024 begins, the following are key Wealth Management strategies to review.

Your Relationship with Your Wealth Management Partner 

A wealth management partner should feel like an extension of your family. You trust them with the details of your family finances, grant them access to your assets, and rely on them to guide your decision-making. It is important to be sure you are partnering with someone who gives you the personal attention you deserve – whether you are their wealthiest client or at earlier stages of your wealth management journey. Wealth managers should treat millionaires like billionaires – in other words, middle market clients who have investable assets of one million dollars and more deserve the same white glove treatment as those clients who have billion-dollar assets. That means a high-touch, dedicated advisor who is consistently available to answer your call, address questions and provide guidance. It means acting swiftly when a client has a request or concern. Clients of large banking institutions need to pay particular attention to the type of service they are receiving. You may not be getting the one-on-one personal service you deserve, something Signature Chicago Wealth Management prioritizes at all times.

Think About Your Tax Strategies for the New Year

It’s the beginning of a new year, an important time to be thinking about your taxes and tax strategy for the year ahead. A key component of this area is gifting and charitable contributions. Have you planned ahead for these areas in your budget?  Each year, the amount of a charitable gift you can deduct against your income tax is capped at a percentage of your adjusted gross income; that percentage is higher for gifts to public charities and donor advised funds than gifts to private foundations, and is higher for gifts of cash than gifts of non-cash assets.  Talk with your accountant about how your gifting may reduce your tax bill.

In addition to reviewing your gifting and other legacy issues, work with your various family advisors to identify opportunities to utilize an efficient Tax Loss Harvesting strategy. Partnering with your tax and legal advisors, your wealth manager can assess your portfolio(s) for opportunities to implement an efficient tax loss harvesting strategy.  Strategize with your wealth manager and other advisors on how this may benefit you.

Schedule a meeting with your wealth manager now and plan for the future. Regardless of where you are in your wealth management journey, it is crucial to have a partner who understands your goals and is available to work with you closely every step of the way.

**This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

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