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You’ll find the answer to that question at the end of all this explainin’

I’ve been hammering away at how narrow this market rally is. Most of the gains have gone to investors in just a handful of very big technology stocks.

You know that. But did you know how middle of the road the gains have been in the index if it wasn’t weighted so heavily toward these high market cap stocks?

Remember that the S&P 00 is a weighted index. It gives more weight to the gains or losses from a stock with a big market capitalization than to the moves in the price of a stock with a smaller market cap. The index is weighted toward big market cap stocks in its very makeup, of course. It is composed of 500 “leading companies,” which in practice means large companies. It’s that focus on large companies that gives the S&p 500 such reach. The stocks in the index account for 80% of global available market capitalization.

The median market capitalization of the 500 companies in the index is $28.5 billion.

Which seems like a lot of money until you remember that Apple (AAPL) has a market cap of $2.9 trillion. Microsoft (MSFT) is at $2.6 trillion. Alphabet (GOOG) is at $1.6 trillion. Nvidia (NVDA) is at $1.1 trillion. Even some troubled big tech companies still have huge market capitalizations. Tesla (TSLA) has a market capitalization of $810 billion. Meta Platforms (META) has a market capitalization of $720 billion.

The size of those companies results in a huge magnification of the gains in those stocks when it comes to calculating the S&P 500 index. And those gains in 2023 have been stunning.

For 2023, the weighted S&P 500, that’s the S&P 500 that everyone uses and that gets reported on Bloomberg and Yahoo Finance, is 14.77%.

for 2023, Apple shares are up 40.94% and up 20.71% in the last three months. Shares of Microsoft are up 41.23% for 2023 and 29.61% in the last three months. Alphabet has gained 40.18% in 2023 and 31.97% in the last three months. Tesla is up 101.47% and up 40.12% in the last three months. Meta Platforms is up 127.15% for 2023 to date and up 40.89% in the last three months. And the biggest gainer in the group, Nvidia is up 194.27% in 2023 and 78.70% in the last three months.

So how big a difference has market cap weighting made?

Remember the market cap weighted S&p is up 14.77% in 2023 as of June 14. And up 12.02% for the last three months.

The equal-weighted S&P 500, on the other hand, is up just 4.77% for 2023 as of June 14 and ahead 5.18% for the last three months.

Those aren’t bad performance numbers for half a year or so, but they are, for 2023 at least, only about one-third of the gain of the market cap-weighted index.

So what strategy do you adopt looking at these numbers?

One possibility, and I think this is a reasonable alternative if GDP growth remains in positive territory rather than slipping into a Recession, is to go with the BIG cap growth trend. I’d certainly be willing to keep riding Nvidia and Microsoft, for example, into the fall. And perhaps longer.

Another possibility, and maybe even a strategy to use in combination with possibility #1, is that you recognize that the valuations and prices being sported by these biggest of the big cap names aren’t sustainable. And that maybe it’s time to think of taking some profits in some of these stocks and rotating into stocks with solid growth prospects but lower valuations. In my recent post “10 stocks for a core portfolio” you’ll notice, for example, that picks Cummins (ÇMI) and Southern Copper (SCCO) have very reasonable price-to-earnings ratios. One of the artifacts left by a very narrow rally is that some really good stocks have been left behind. Not everything in this market is overpriced.

Now we get to see if the market as a whole and this rally resolve toward continued gains as leadership broadens to more stocks or toward a pullback to the bottom of the trading range.