Market Concentration Risk

Happy Sunday,

When was the last time you saw the S&P 500 making new highs while the vast majority of stocks were going absolutely nowhere?

If you answered "right now," you'd be correct.

That's not normal bull market behavior.

I spend an unhealthy amount of time staring at breadth indicators, sector rotation, and how money is actually moving through this market. What I'm seeing right now is a market that's completely bifurcated (I love that word). The headline numbers are telling us one story while the market structure is yelling something entirely different.

Today I'm chatting about what's beneath the surface. Because if we are making decisions based only on what the S&P and tech are doing, we are only seeing 10% of the picture.

Let's dig in…

Market Breadth Is Screaming Concentration Risk

Don't let the main indices fool you the true story of the market is being told by equal-weighted counterparts, and the relative under performance is massive.

The Equal-Weighted S&P 500 has spent six months trapped in consolidation near its breakout point. Despite the powerful AI tailwind driving headline indices higher, the Equal-Weighted Nasdaq has managed just 4% gains over the same period. These numbers tell you everything: market gains are flowing to a handful of names while the broad market trails far behind, posting 0% and 8% annualized returns respectively.

Rotation Signals Are Flashing

The divergence between growth and value is becoming impossible to ignore. $VTV ( ▼ 0.2% ) , our proxy for quality, sits at highs despite only a 5% gain since April. Meanwhile, $VTG ( 0.0% ) , the growth proxy, looks ready to break down yet still trades at a 10% premium to those April levels. Capital is rotating out of growth and into value.

The unprofitable growth trade is getting hammered. $ARKK ( ▼ 0.22% ) is down 17% from highs but still hovers 10% above April. $IPO ( ▲ 0.41% ) , the IPO index, has broken below April highs down 20% …the biggest pullback since the 2021 bear market outside of the April tantrum.

Small Caps Still Aren't Invited to the Party

$IWM ( ▲ 0.29% ) attempted a breakout but failed. For any healthy uptrend, it needs to find footing soon multiyear support sits just 6% below current levels. $IJR, our quality small cap proxy, is lagging even further behind, showing that growth still commands a premium even in the beaten-down small cap space.

We're not in a true small cap bull market yet. There's been no breakout, no new uptrend. We've been consolidating above pre-2021 highs since August, but that's not the same as actual bullish momentum.

Lets cut to the chase

For a sustainable broad market rally, you need capital flowing into the market as a whole not just the AI theme. Until we see real participation across sectors, equal-weighted indices finding legs, and small caps breaking out, this remains a concentration story masquerading as a bull market.

Stay Curious

- John