U.S. President Donald Trump likes to take credit for the great performance of the stock market since his election. When we look under the hood at what is leading the markets higher, it’s clear that the average stock is not nearly doing as well as the few stocks that have been leading the markets. Late in the market cycle, this way of looking at the market outlook - known as breadth analysis - can be a helpful leading indicator. By far, the strongest sector has been technology. Today, the technology sector represents over 21.2 per cent of the S&P 500, with the top five stocks in the sector more than half of that weight. On Nov. 8, 2016 when Trump was elected, technology was 16.8 per cent of the index. The vast majority of stocks in the sector are in the NASDAQ 100 index and even more concentrated in a hand full of stocks that have become known as the FAANGs.

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The top five companies in the NASDAQ 100 - Microsoft, Amazon, Apple, Facebook, and Google parent Alphabet along with the top to semiconductor stocks Intel and Cisco - make up half the index. The above chart shows that SMH (VanEck Vectors Semiconductor ETF) and the QQQ (Invesco Nasdaq 100 ETF) have massively led the markets higher. If we were to subtract the performance of these groups and look at the S&P 500 index ETF (SPY) and the S&P 500 equal weight index (RSP), you can see the dramatic difference in performance.

Looking further past the size and influence of the largest companies, the smallest 2000 companies in the Russel 2000 index ETF (IWM) has only returned 6.8 per cent annualized compared to the 15.75-to-17.55-per-cent returns of the big tech giants and semiconductors. We can see that the average return of an equal weight S&P 500, which smooths out the average return, is about half the big influences. And when we look at the value side of the S&P 500, which removes most of the growth tech giants, shows more than one per cent less.

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So, now we look under the hood and see how the average stock - as measured by the Russell 3000 which includes the S&P 500 large caps, S&P 400 mid caps, and the Russell 2000 small caps – is trading relative to their own 200 averages. We can see a clear decay, in that the average stocks is now below longer-term trend lines and that the broad-based market is far weaker than the headline indexes suggest.

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As always, this does not mean you run out and sell everything you own. When we see this and combine it with the message from the inverted yield curve, it suggests that you may need a bit more sleep-at-night factor in your portfolios until market valuations improve. Historically, that’s about a 30 per cent correction in the broad U.S. equity markets.

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