"Stocks on Pace for Fourth Consecutive Week of Gains."
You might have seen that headline or ones like it this morning. I saw it flash on the screen while watching CNBC. But technically this is incorrect. "Stocks" are not trending higher, the indexes like the S&P500 and Nasdaq are trending higher, but most stocks are not trading in correlation with the indexes.
There is a tendency for the folks in the business media to think of the indexes as the market. The truth is that the indexes are calculated in a way so that a small group of large-capitalization stocks has much more influence.
For example, the S&P 500 and Nasdaq are constructed on a market-cap-weighted basis. Apple (AAPL) , with a market cap of $2.5 trillion, is the largest weight in both indexes. This single stock offsets all 2,000 stocks in the Russell 2000 exchange-traded fund (IWM) , which has a market cap that is roughly equal to $2.5 trillion.
Theoretically, it is possible for Apple to offset a decline in all 2,000 Russell stocks. Breadth could be one advancer to 2,000 decliners, and the indexes could still be positive.
That is roughly what has been going on in the market lately. A dozen or so big-cap technology stocks outweigh thousands of smaller stocks, so we end up with the indexes moving higher even though the average stock is acting quite poorly.
The Dow Jones is calculated based on price weighting, which makes it even worse in many ways. The stock with the largest influence on the Dow is UnitedHealth Group (UNH) , which is the highest price at around $417. Goldman Sachs (GS) is second with a price of $373. Apple is the 18th highest priced out of 30 stocks, so its influence on the Dow is much less than on other indexes.
The important point is that if you want to really understand what is going on in the market, then it is necessary to look beyond the indexes. The indexes mainly tell us what big cap and high-priced stocks are doing. They do not reflect the action in thousands of other stocks very well.
The market action continues to deteriorate. The indexes have reversed lower, and breadth has gone from positive to solidly negative again. The Nasdaq 100 is green, but about half the stocks in that index are trading in negative territory.