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The chart below is a comparison of the S&P 500 Capitalization Weight Index (blue) and the S&P 500 Equal Weight Index (red) showing the percentage return since Jan 4th 1999:
I find it interesting that most people refer to the S&P 500 cap weight index while the equal weight index is a truer reflection of ‘the market’. Also, as you can clearly see, the equal weight index has trounced its cap weighted cousin for more than 3 years. Of course, this outperformance is due to the bull market in the small and mid-cap sectors.
It’s also interesting that while the cap weight index continues to groan under the weight of previous resistance set in 2000, the equal weight index is flying strong and steady - having cleared its bubble high long ago.
You can ride this trend by buying RSP, the Rydex S&P 500 Equal Weight ETF. Or you could simultaneously buy it and short an equal dollar amount of SPY. This market neutral position would allow you to profit even if the general market takes a tumble.
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