Apple Inc. is one of the most widely owned stocks in the world. It is the largest holding in both the S&P 500 and Nasdaq 100 index. If you are a passive investor and own broad-based, market-cap weighted index funds, you likely own a lot of Apple. In recent months, the mega-cap technology names that make up similar benchmark indices have fallen out of a favor. Stocks like Apple, Facebook, Nvidia, Microsoft and Adobe have seen their relative strength charts top between July and September of 2020. In the mean time, equal-weight indices and smaller cap size companies have outperformed.
There’s an erroneous belief among financial advisors and money managers, that in order for the broad market to rally, these mega-cap technology companies are required to participate. In the past 24-months, how many times have you heard the below?
“The FAANG names are really driving this market.”
“This market is made up of 6 stocks!”
“It’s all about the COVID-19 have and have nots!”
“If these mega-cap names roll over, this market is finished!”
As technical analysts, we roll our eyes at these comments. Why? Because at no point was the data ever in favor of that viewpoint. For instance, we saw new highs in the S&P 500 Advance-Decline Line back in August and again in October. This was despite tech leadership beginning to wane. Tech is lagging and the benchmark US stock index has improving net advances? Hmm, quite interesting. Breadth can be found without the leadership or participation from large/mega-cap tech stocks.
I don’t bring this up to recommend ditching your mega-cap tech stocks and buying into banks & energy. I’ve been super hesitant to lean into cyclical value and only have come around to dipping my toes into these sectors over the past month or so. 2021 has provided a lot of evidence in favor of leaning outside of largecap growth/tech and into sectors that have been out of favor in recent years. The purpose of this post can be summed up in the below chart. Thus far in 2021, Apple Inc. which is the largest holding in the S&P 500 Index, has made consecutive lower highs and lower lows. All the while, the S&P 500 index continues to form higher highs and higher lows.
Broad-based indices do not require their largest holding to participate in a legitimate move higher. Strong breadth remains a bullish data point in this market. Just because Apple is lagging the market doesn’t mean you shouldn’t own the index!
That’s enough outta me.