Key Points

  • “Big five” stocks recently hit an extreme of weight within the S&P 500 relative to the market peak in 2000; but their valuations are more reasonable today.

  • Small options traders continue to bet on unpaired call options; while large speculators are betting against the tech-heavy NASDAQ 100.

  • Rotation could give way to broader-based selling if economic data fails to support recent leadership by more classically-cyclical sectors.

As of this writing, it’s a rough start to the week for U.S. equities. Major indices attempted to find more stable ground last week, but volatility risks persist and the bears are winning the latest round. Policy risks abound—not just election-related, but both monetary and fiscal policy as well. There is little progress being made in getting the next fiscal relief package passed; while the rate of change of the Federal Reserve adding to its balance sheet has stalled. Given the bull market since March 23 was heavily supported by the boost to M2 money supply driven by both monetary and fiscal policy—nearly 25% year/year growth in M2 at the recent peak—the waning of that policy support remains a headwind. Basically, the shock and awe era of policy stimulus appears to be in the rear-view mirror.

Other risks include surging coronavirus cases in Europe, election uncertainty and ongoing pockets of speculative excess—particularly within the options market, and driven to a large degree by the short-term trading of many newly-minted small investors. I last wrote about this in late-August, including about the dominance of a handful of stocks—albeit easing a bit lately—as a warning sign (especially at the market’s highs earlier this month). As you can see below, the S&P 500 index overall is up +2.7% year-to-date (through Friday’s close); but there is a stark difference in the performance of the five largest stocks (Apple, Microsoft, Amazon, Facebook and Google/Alphabet), which are up nearly +29%, and the remaining 495 stocks, which are down -3.4%.

A Tale of a Few Stocks

Source: Charles Schwab, Bloomberg, as of 9/18/2020. Past performance is no guarantee of future results.


I’ve done dozens of client webcasts since business travel ground to a halt. Since the March market low, the most-asked question on those webcasts has been about the perceived disconnect between the stock market’s ascent and the still-beleaguered economy. But the aforementioned narrowness in the market may in fact have been reflective of what’s been happening in the economy. This is not an endorsement of the big five stocks; but think about how much time you spend each day within the ecosystem of these companies—certainly amplified in the pandemic era. The big five have outsized market share in terms of their revenues, earnings, profit margins; and of course market capitalization. In contrast, large swaths of the economy remain in ill health; with countless industries and companies fighting for survival.