Davide Semilia @DavideSemilia: "When the Index Lies: How..."

Italy

When the Index Lies: How 5 Stocks Can Hide a Falling Market Last week the S&P 500 hit a new high. But here is what almost nobody noticed: the percentage of stocks trading above their 50-day moving average dropped to 58%. A month ago it was 74%. This is called a breadth divergence, and it is one of the most reliable warning signals in markets. Here is how it works. The S&P 500 is weighted by market cap. That means $AAPL (Apple) alone moves the index more than the bottom 100 stocks combined. So when mega-caps like $NVDA (NVIDIA Corporation) $MSFT (Microsoft) and $AMZN (Amazon.com Inc) are rallying hard, they can drag the index higher even while hundreds of smaller companies are quietly bleeding out. Think of it like a class where 3 students score 100 and pull the average to 75, while 20 students are actually failing. In late 2021 this exact pattern played out. The S&P kept grinding higher through December on the back of a handful of mega-caps, while the Russell 2000 had already been falling for months. By January 2022 the broad market caught up with reality and everything dropped 20%. The current setup rhymes. The equal-weight S&P 500 $RSP (Invesco S&P 500 Equal Weight ETF ) has been underperforming the cap-weighted version since March. When these two start diverging, it means the rally is getting narrower and narrower, standing on fewer legs. I watch this spread every week. When $RSP lags the S&P by more than 3% over a month, I start tightening stops and trimming positions that depend on broad market strength. The index can lie for weeks, but breadth always tells the truth eventually.

Not investment advice. The author may have financial interests in the mentioned instruments.