The stock market spurt of the past week might not qualify as a huge rally, but it sure has been a rally of the huge.
Shares of the very largest companies in America have outpaced the broad market by an impressive margin during the brisk rebound of the past several days.
An exchange-traded fund called Guggenheim Russell Top 50 Mega Cap (XLG) tracks the 50 largest U.S.-listed companies and from a week ago Wednesday through last night it was up 4.7%. The S&P 500 (^GSPC) over that time was up 3.8% and the equal-weighted version of the S&P 500 – a proxy for the “average stock” that trades as Guggenheim S&P Equal-Weight ETF (RSP) – was ahead just 2.9%.
This recent preference for the stocks of the bluest chips was hard to miss even in Thursday’s drowsy little rally. Apple Inc. (AAPL), on no news, gained 1.3% versus 0.8% for the broad market. Microsoft Corp. (MSFT) and IBM (IBM) were also clear leaders.
And even General Electric (GE) the leading example of a go-nowhere blue chip stock – was ahead by 4.4% since last Wednesday and looks to gain further on a decent quarterly report itself.
So, what’s behind this sudden preference for the giants of the market?
For one thing, it shows that investors, for the moment, are not particularly spooked by the further lift in the value of the dollar or its possible effect on multinational earnings. It’s not obviously about a sudden brightening of the global growth picture, it seems, given the continued weak relative action in pure industrial stocks, as shown by the Industrial Select Sector SPDR (XLI) ETF.
More to the point, this is the kind of action that often comes as investors who had been in a defensive stance and under-invested try to throw money at the obvious stocks in order to participate in a quick up move in the market.
As noted here earlier in the week, the latest Merrill Lynch survey of global fund managers found professional investors had more spare cash on hand than at any time since the Lehman collapse.
The failure of the Greek standoff or the China stock market tumble to rupture global markets or drag down economic expectations has led to a rapid draining away of anxiety. The VIX index of protective stock-option demand has collapsed in the past week or so, and yesterday dropped below 12 for a time – a rather depressed level that speaks to expected calm.
When investors find themselves wrong-footed as stocks recover, an easy thing to do is to deploy some cash in some laggard shares of stout, steady businesses.
I’ve noted in the past that this type of pattern frequently comes toward the latter phase of a short-term rally, as investors understandably look for stocks that haven’t fully participated.
GE might be the best example of this. In the past couple of year, whenever GE stock has bumped above around $27, it has meant that the broad market was due to flatten out or pull back.
This dynamic will probably change at some point, as GE continues to methodically recast its business mix and the stock finally inflicts maximum frustration on its loyalists. But who’s willing to bet that moment has come at last?
Bottom line: The market has steadied itself and appears to be looking at the bright side of this earnings season. All well and good, no immediate need for any alarms to sound.
Yet with the S&P 500 again at the top end of its long-held trading range, it would probably be better if the lumbering giants of the market stopped having to do so much of the work.
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