Using the ratio of equal weight S&P 500 to the market cap weighted S&P 500 provides great insight into how concentrated the market is.
Market Concentration
Market concentration tends to grow as a bull market extends into its older age. There are some basic structural reasons for this.
Bull markets tend to end when the current market regime sees a trend change. During a typical bear market, you will actually get MORE piling into the winners and selling of losers. This is likely a product of paring down leverage and reducing market exposure during bearish environments, wherein investors hold their winners and sell their losers.
With that said, new bull markets start with the macro regime shift where laggards start to take over and reverse the previous market concentration.
The process will hold for a while during a new bull run, until new market leadership is well established, and weightings again start to reverse the concentration within the major indices. At this point, the SPX/RSP ratio will start to shift upward yet again, indicating the latter parts of a bull run. These runs do not have set time frames, but they can give indication of where the market is at *currently*. As we can currently see, we are likely not in a new bull market / macro regime as the previous concentration has not reversed. As a result, we are still in either the previous bull run, or an ongoing bear market.
Market Concentration
Market concentration tends to grow as a bull market extends into its older age. There are some basic structural reasons for this.
- Portfolio Managers & discretionary investors naturally pile into winning stocks
- Passive funds by their very mandate are forced to buy more of the stocks with higher market cap weighting
- The two aforementioned items force momentum to continue buying the winning stocks and sell the losing stocks
- Rinse and repeat all the aforementioned steps an you get a steepening concentration into winners
Bull markets tend to end when the current market regime sees a trend change. During a typical bear market, you will actually get MORE piling into the winners and selling of losers. This is likely a product of paring down leverage and reducing market exposure during bearish environments, wherein investors hold their winners and sell their losers.
With that said, new bull markets start with the macro regime shift where laggards start to take over and reverse the previous market concentration.
The process will hold for a while during a new bull run, until new market leadership is well established, and weightings again start to reverse the concentration within the major indices. At this point, the SPX/RSP ratio will start to shift upward yet again, indicating the latter parts of a bull run. These runs do not have set time frames, but they can give indication of where the market is at *currently*. As we can currently see, we are likely not in a new bull market / macro regime as the previous concentration has not reversed. As a result, we are still in either the previous bull run, or an ongoing bear market.