A Month For “the Rest”

We’ve made numerous mentions of the weakness in mega-cap stocks so far this month, and given their weightings in the S&P 500, the impact on the index is notable. The S&P 500 peaked on 6/2 and quickly sold off in the early days of June. A mid-month rally brought the market back near its prior highs, but momentum has stalled since 6/15 with a string of weak days with consistent intraday selling.

Although the cap-weighted S&P 500 has been weak, performance outside the largest eight stocks has been better, and the average stock has seen modest gains this month. This is reflected in the performance of the S&P 500 Equal Weight index as proxied by the RSP ETF.  Unlike the cap-weighted index, RSP made a higher high in mid-June, but it has also seen some, although not as consistent, weakness in the last few days.

With their divergent returns this month, the cap-weighted S&P 500 (SPY) is down 2.4% this week while the equal-weighted (RSP) is up 2.4% for a performance gap of 4.8 percentage points. There are still a few days left in the month, but this type of divergence is nearly unheard of.

What’s also interesting about the divergent returns is that this June is on pace to be the second time this year that the monthly performance spread between the two indices exceeded four percentage points. In the nearly 17 years from the launch of RSP in 2003 through 2019, the monthly performance gap between RSP and SPY was typically narrow, exceeding three percentage points just three times. In the six and a half years since then, though, there have been twelve separate months when the performance spread exceeded three percentage points. Quadruple the occurrences in nearly a third of the time!

Investors can’t seem to make up their minds. Do they want the mega caps or everyone else?

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