The US rally has been driven by a small number of mega-cap tech stocks. Does that matter?
Multiple strategists are concerned about the narrowness of the US advance, as documented in recent Stocktake columns. For example, the tech-heavy Nasdaq has soared this year, but just four stocks account for half those gains.
The good news: that’s normal, says Ned Davis Research’s Ed Clissold. He examined previous strong years where the Nasdaq gained 10-25 per cent. The median number of stocks accounting for half those gains? Just three.
However, other concerns about market breadth are valid. A healthy rally should be broad, one where most stocks are participating in the advance. Clissold notes just a third of stocks were recently trading above their 50-day average. That number rose last week, and investors will be hoping it continues to rise, as low numbers are “worrying”.
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Meanwhile, the number of stocks trading above their longer-term 200-day average is “hanging in there”, implying the technical damage in early March was “manageable”, but it’s wise to “watch on any renewed weakness”.
Overall, there are some concerns about breadth, but investors need not fret about a few mega-cap stocks accounting for most of the gains. That’s just how capitalisation-weighted indices work, says Clissold.
