S&P 500 Rallies as Only 42% of Stocks Top Their Average

The S&P 500 hit a fresh all-time high on June 7, continuing its uptrend. The index itself is 3.3% above its 50-day moving average as of the June 10 close. Yet many stocks aren’t moving up with the index.

The major indices, like the S&P 500 and Nasdaq 100, look to be in a strong utprend. Yet other indices like the more comprehensive NYSE composite—which includes stocks of various sizes and from different industries—are looking much weaker. The Russell 2000, which includes the smallest 2000 out of the largest 3000 stocks in the US market, is also looking weaker than the Nasdaq 100 and S&P 500.

Cory Mitchell, an analyst with Trading.biz commented “Only 48% of S&P 500 stocks are above the 50-day moving average, while only 42% of all US stocks are. This signals that the stock market isn’t quite as healthy as the S&P 500 and Nasdaq 100 make it look.

This can happen because each company in these indices doesn’t have an equal weight. Four to five stocks (of the 500 and 100 in the S&P 500 and Nasdaq 100, respectively) account for about 25% of these indices’ portfolios.

If those four to five companies are moving up, they can drag the index with them, even though many of the companies in the index may not be doing as well.”

Both the S&P 500 and Nasdaq 100 are heavily concentrated in:

Microsoft (MSFT)
Apple (AAPL)
Meta Platforms (META)
Amazon (AMZN)

All these stocks are trading close to their 52-week highs, which helps drag these indices up to near highs. Yet the data shows that 58% of US stocks aren’t trading near 52-week highs and are actually below their 50-day moving average.

This divergence between how the majority of stocks are acting and the major indices signals the potential for choppy trading, or even a pullback in the major indices if the NYSE Composite and Russell 2000 continue to weaken.

More accurately, the choppy trading has already begun, because many stocks have not been participating in this S&P 500 and Nasdaq 100 June rally.

What does this mean for swing traders and investors?

Buy-and-hold investors ride out the short-term fluctuations and have a long-term goal of capturing the yearly average return for a specified index. No adjustment is required.

For active investors or swing traders who are looking to enter on the long side during the good times and exit for the bad times, they may want to pay attention.

A divergence in indices isn’t a prediction of what will happen, it is simply a warning sign. If current positions are acting well, hold them, but be aware that the stock market is not as healthy as it may appear, so consider using a trailing stop losses or smaller targets while the situation persists.

Generally, the easiest money is made in uptrends when most stocks are moving up. Then even a randomly selected stock has a good chance of making money.

When the Nasdaq 100, S&P 500, and NYSE Composite aren’t moving in the same direction, or fewer than 50% of stocks are above their 50-day moving average, it is going to be tougher conditions for making money on trend trades to the upside.