Trader’s Narrative

Book Giveaway
If you haven’t already, throw your name into the hat for a giveaway of:
Hedge Fund Operational Due Diligence (follow link and submit comment)

For obvious reasons, the current bear market has been relentlessly compared to the previous one that we lived through just a few years ago. But while a long term chart of the S&P 500 Index (SPX) would suggest, through a massive double top formation, that the two are similar in scope, that isn’t really the case:

In fact, if we look at the stock market as would the the average investor, we find that the average “Joe” has lost much more money in this bear market than the last.

That’s because no one really allocates their portfolio according to the capitalization of the stocks they are buying. Instead, they buy a smattering of mutual funds, individual stocks, sector ETFs, etc. So a more accurate representation of this “average” portfolio is the equal weight indices. For example, as represented by the Rydex S&P 500 Equal Weight (RSP) ETF:

Although the chart above is for the ETF, it is confirmed by the more widely used equal weighted index, the Value Line Arithmetic Index - a much wider index with 1700 individual constituents. It has also fallen approximately 60% in this bear market.

The other interesting aspect of the market that we see through this chart is that in both cases, capitalization weighted and equal weighted, price has approached (and seemed to have bounced off) support.