It would be funny if it weren’t true…<\/p>\n
But according to a Bloomberg article from May 12, 2017, this is the exact lunacy we find ourselves in.<\/p>\n
It’s why we’re seeing selling – seemingly out of nowhere – on a wholesale<\/em> basis.<\/p>\n You see, the indexing business is big for Wall Street. They’ll create an index, then create an exchange-traded fund (ETF)<\/a>, and sell it to the public. But there’s only so many ways you can slice and dice a finite set of stocks.<\/p>\n This is creating the same type of adverse conditions that indexes are supposed to protect investors from.<\/p>\n But, no one is talking about this.<\/p>\n Instead, people are blaming the Fed for valuations that paralleled those of the 1999 tech bubble. We saw these levels as early as January 5.<\/p>\n For sure they dropped the ball… as we here at Market Minute<\/em> were saying throughout all of 2021<\/a>. But over-indexing and major flaws in their construction are to blame as well.<\/p>\n You see there are two problems…<\/p>\n First, many indexes like the S&P 500 are more representative of momentum than they are of the U.S. economy.<\/p>\n For instance, the S&P 500 is market cap-weighted. Meaning that when it rebalances (usually quarterly), the stocks that rise the most will get a bigger weight.<\/p>\n Today, we’re in a Fed-induced bubble of epic proportions due to 12+ years of interest rates near zero and force-fed liquidity. As a result, the index has basically become a proxy for big-cap tech stocks.<\/p>\n Almost 30% of the index is comprised of just 10 stocks like Apple (AAPL), Amazon (AMZN), Tesla (TSLA), Alphabet (GOOGL), and Meta Platforms (FB).<\/p>\n It’s interesting that, as a whole, analysts have been estimating even higher earnings and sales growth over the next year… except <\/em>for these 10 stocks.<\/p>\n Yet, as a whole the S&P 500 Index is poised to grow<\/em> in earnings and sales.<\/p>\n Take a look at this chart showing what’s really going on within the weeds of the index…<\/p>\n You can see the earnings-per-share (EPS) and sales estimate for these 10 stocks… and then the rest of the S&P 500 index since April 20.<\/p>\n That date coincides with the beginning of this recent big drop in the market – when the S&P 500 index was at 4500.<\/p>\n It’s at 3930 now – down 12.5% in less than a month.<\/p>\n The market’s been falling so much because of these 10 names. You can see how analysts have been slashing earnings and sales estimates for them, but upping it elsewhere.<\/p>\n That means investors flocking to the perceived safety of a “diversified” value index like the S&P 500 are really getting concentrated exposure of stocks that are in the middle of coming out of a bubble with a sprinkling of everything else.<\/p>\n Which is sad…<\/p>\n Because everything else shouldn’t be down this much.<\/p>\n![\"Chart\"](\"https:\/\/cdn.jeffclarktrader.com\/JMU\/images\/202205\/20220513-jmu-01_wqe549.png\")
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