MorningWord 1/28/13: The SPX’s close above 1500 Friday, a new 5 year closing high, is fairly remarkable when you consider that one of its largest components, AAPL, over the last few years made a new 52 week low, and ceded its title as the largest market cap company in the world back to XOM. The ability of equities both large and small to rally to new highs, without one of its biggest horses, is fairly remarkable when you consider just how narrow the broad market rally had been in 2011/2012. To help make this point, at one point AAPL made up almost 5% of the S&P 500 last year when the stock was up 75% back in Sept, now with AAPL down 38% from the highs, the stock is the 2nd largest weighted stock in the index at ~3%, and the SPX is up 2.7% from the Sept levels. The rally has broadened out, and this is obviously bullish for equities.
The top 20 stocks in the SPX make up about 30% of its weight, and aside from AAPL, none of the other 19 stocks are trading at or within 10% of their 52 week lows, but there are a few very noticeable laggards, WMT,KO, T, MRK, MO, MSFT and VZ, that just can’t rally. There are a couple things in common among these stocks, all either offer healthy dividend yields or they were perceived “safety trades” given their defensive nature throughout the European turmoil of the last 2 years. The one year chart below shows the out-performance of WMT, KO & T to the SPX for most of 2012, right up till the mid Nov lows, and then, BOOM.[caption id="attachment_22018" align="aligncenter" width="490"] 1 YR SPX vs WMT, KO & T from Bloomberg[/caption]
I guess there is a couple ways of looking at this, for every one of these mega-caps that is under-performing there is one that is near or making new highs, WMT/COST, KO/PEP, MRK/PFE, MO/PG, MSFT/ORCL…you get the point. Bulls would argue this is a natural rotation, and if we have just entered a secular bull market, than ultimately these under-performers will add some fuel to keep the firing going at a later date as the rally continues to broaden out.
In the short-term, we’re watching price action in the vol market quite closely. As long as protection stays so cheap, investors will have little incentive to sell their stocks, and will prefer to just stay long, and buy cheap puts instead. If options start to get more expensive, we think you might see some stock selling as people lighten up positions as opposed to buying protection.