A Tremendous Disparity Continues within the Stock Market
- cornerstoneams
- 3 days ago
- 5 min read
In today’s edition we will continue to look within the stock market landscape, continuing the general theme of recent editions.
We have been sharing the ongoing stock market leadership transition that kicked off in earnest back in November. Post-2022 in particular, technology as a sector dominated the stock market backdrop in performance.
The broader stock market, comparatively speaking, was largely ignored by collective market participants post-2022. While this began to change in November, it left with it an overriding question as to whether said change could last.
We have seen short periods along the path of recent years where a similar transition unfolded but would then disappear as quickly as it began. Prior attempts had no staying power. It appears this attempt has staying power, and this is notable.
At the same time, there continues to be a fair question emanating from collective market participant behavior as to whether this leadership transition will continue to unfold smoothly or whether it will bring with it overall stock market volatility that will be more than a minor bump.
First, let’s take an updated look at the described transition since November directly below.
The three vehicles we are using in this edition to depict the transition to new leadership are the Dow Jones Technology Index (red line), the Dow Jones Industrial Index (black line), and the S&P 600 small company index (blue line.)
The Dow Jones Industrial Index (black line) should not be confused with the well-recognized Dow Jones Industrial Average. The Industrial Index above encompasses more industrially oriented companies.
We shared the above within an edition at the beginning of February. Underlining this leadership transition attempt, the above disparity has increased since then. This offers both staying power attributes of this leadership transition, while simultaneously offering a cautious concern in light of this increased disparity.
As we have offered within recent editions, when deeply established leadership within the stock market begins to be rotated out in favor of new leadership, it typically brings with it volatility at a minimum.
Worse, it is not unusual for a leadership transition process to bring with it notable stock market tremors to the point of impacting the stock market at large. Think of a backdrop whereby the stock market as a whole is negative, not by just a few percent, but rather, down some level of double digits.
Unseating deeply entrenched leadership typically does not offer a smooth ride.
Importantly, there is no certainty that this will be the case just because history offers it as a storyline of leadership transition. This is why we continue to focus on this transition process, while simultaneously keeping in our minds that this process can get messy.
In light of the above disparity actually increasing in recent weeks, it is keeping us focused on this transition question.
Directly below, let’s look at broader stock market indices to get a sense of how this is playing out using well-recognized stock market gauges.
The above also dates back to the beginning of November up to the current day. The black line is the equal-weight S&P 500, while the blue line is the traditionally reported, weighted S&P 500 index.
Speaking to the leadership transition, it is clearly showing up in the performance differentials of these two S&P 500 indices.
The weighted version (blue line), which places outsized weight on select companies that are predominately technology oriented, is barely positive in performance since the beginning of November.
Meanwhile, the equal-weight S&P 500 index (black line) is trouncing the performance of its weighted cousin. This represents a major change in the behavior of the stock market structure, in particular post-2022.
In light of technology companies generally incurring poor stock market performance since November, they are dragging down the well-recognized weighted S&P 500, in particular when compared to leading areas as offered in our first chart, along with the equal-weight S&P 500 (black line) in the above chart.
Further deterioration in technology performance within the stock market, if it continues to occur such as is depicted in our first chart, will drag with it the weighted S&P 500, and, through this, can have a negative contagion impact throughout the stock market.
While this leadership transition is good for the stock market structure being that it represents a much broader market landscape and a healthier bull market environment, if technology gets too heavy, too fast, risks increase that said structure will also incur near-term drawdowns.
For our part, because we never lose sight of the fact that this stock market is epically highly valued when viewed through any valuation lens, through any historical timeframe observed, we are hyper-vigilant on the above leadership transition and the risks it can bring with it in light of prior leadership (technology) being bid down such as it is.
Highly valued markets can become unruly quickly when structural pegs, if you will, are repositioned.
Reduced to simplicity, below we will keep it as simple as possible using an index as a guidepost for the new leadership.
In our previous edition we shared the above chart in light of its participation in the Dow Theory approach toward market analysis. The above is the Dow Jones Transportation Average.
This area of the stock market has been particularly ignored over the previous four-plus years. It has notably come to life as 2025 evolved with its November-to-current-day run leaving it as a shining star within the stock market structure. It has been a clear leader; stronger than even the leaders shared in our initial chart.
The red horizontal lines denote the trading range this average has been trading in over recent years.
The breakout above the red line was a very important behavioral statement by collective market participants. They bid this previously ignored area of the market up to and through new highs. Our blue arrow highlights the powerful breakout, and with it emphasizing a clear behavioral change.
Keeping it simple here, this leadership space should be able to hold its breakout level. The top red line should hold as a support, whereas previously it had been a ceiling that it was unable to penetrate.
If we see the market overall pullback, this Transportation Average and its behavior will offer important information relative to this overall leadership transition that we have been addressing here and in recent editions.
This leadership transition should prove to be very interesting as the near-term weeks and months unfold.
I wish you well…
Ken Reinhart
Director, Market Research & Portfolio Analysis
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