The divergence beneath the surface of the S&P 500 has reached historic extremes

The divergence beneath the surface of the S&P 500 has reached historic extremes

As Big Tech stocks pushed higher last week while the rest of the market lagged, the gulf between the performance of the S&P 500 and its equal-weighted sibling reached a notable new extreme.

For the first time based on data stretching back to 1990, the traditional capitalization-weighted S&P 500 outperformed the S&P 500 equal-weight index by 2 percentage points or more for two straight weeks, according to Dow Jones Market Data.

But that wasn’t the only milestone hinting at the growing divergence between the two indexes, which is used by analysts as a rough gauge of market breadth.

According to Jonathan Krinsky, chief market technician at BTIG, the relative-strength index for the S&P 500 finished above 70 on Thursday while the RSI for the S&P equal-weight index finished below 50 for the first time based on data going back to 1990. Then it happened again on Friday.

The gap between the two momentum indicators is significant, Krinsky explained. A reading above 70 on the RSI, a momentum gauge used by many technical analysts, signals that a given index or security has become overbought, while a reading below 50 is a sign that it has become oversold.

That the two gauges appear to be heading in different directions is the latest indication of just how bifurcated the U.S. market has become.

This wasn’t the only alarming new indication of how much market breadth has soured recently. The share of S&P 500 members trading above their 50-day moving average has dropped below 50%, while the index itself continued to trade north of its intermediate-term average by more than 4%.

This hasn’t happened since December 1999, a few months before the tech bubble burst, Krinsky said.

The U.S. stock market’s “bad breadth” has been a popular topic among investing professionals for much of the past year.

But last week, analysts’ chatter about the increasingly narrow nature of the market’s advance appears to have reached a fever pitch. Many rattled off various metrics showing that the divergence beneath the surface of the S&P 500 has reached historic extremes, as only a handful of stocks — recently mostly Nvidia Corp. and Apple Inc. — contributed to the S&P 500 hitting record highs during four out of five days last week, according to FactSet data.

See: As Nvidia soars, the stock market’s deflated laggards spark concern

A team of analysts at Bespoke Investment Group shared a few more factoids highlighting how the S&P 500 seemingly no longer reflects the performance of its average member stock in a note shared with MarketWatch on Monday.

The index’s cumulative advance-decline line over the last year has failed to make a new high along with the index this year. Instead, the difference between the number of S&P 500 stocks trending higher and the number trending lower has actually continued to widen in favor of the decliners.

The S&P 500 also finished last week with more member stocks hitting new 52-week lows than new 52-week highs.

Finally, while the S&P 500 remains solidly in overbought territory, the S&P 500 technology sector has reached an even greater extreme. As a result, the gap between the 50-day moving averages between the two has reached its widest level of the past year.

But even within the technology sector breadth has deteriorated recently, a sign of the increasingly outsize influence exerted by a handful of megacap stocks. Fewer than 65% of companies in the sector were trading above their 50-day moving average recently, well below levels from earlier in the year.

Both the S&P 500 and Nasdaq Composite were trading higher on Monday, with the latter on track to climb for a sixth straight day, according to Dow Jones data. Meanwhile, the Dow Jones Industrial Average was poised to fall for a fifth straight session. The last time the Dow fell for five straight days while the Nasdaq rose for five or more straight days was in August 2016.

Meanwhile, the equal-weighted S&P 500 was also higher, although it continued to trail its cap-weighted peer.