More and more stocks are participating in this advancing market. The Value line Geometric Index, a fancy term for a basket of stocks that tracks the median performance of roughly 1,700 companies, is hitting new highs. This means market strength is broadening beyond the top-heavy, large-cap companies, suggesting a healthier, more sustainable market environment. While major indices and a handful of stocks dominate the headlines, the robust performance of the “middle stock” historically indicates a strong, foundational market structure.
It’s hard to see through the flashy headlines and easy to get caught up in thinking the market is either doing great or poorly based on the performance of a few popular companies. Even looking at the major indices doesn’t always give you a true reading. For the most part as long as things are going up and portfolios are making money nobody cares. But if you want a read on where things might be going then take a look at the stock sitting right in the middle. Not the biggest winner and not the biggest loser, but the one in the middle. If we lined up the roughly 1,700 stocks that make up most of the NYSE composite from best performer to worst and plucked the one standing in the middle that would approximately give us the median performance of the market. It’s important to have this information because we’ve all seen what happens when a handful of stocks from one industry dominate the markets while others are left behind. Think of the dot-com bubble and the Great Financial Crisis. In both cases the Value line Geometric index rolled over well before the broad market crashed. Market internals were deteriorating but people ignored it as the indices marched higher on the backs of internet companies and banks, respectively.
In this market, we are seeing exactly the opposite. Large-caps pulled the market higher, then paused while the rest caught up. The middle stock is doing great, recording new highs while mega-caps are sitting at the same level they were last October. This isn’t what you’d expect to see if the foundation was giving way. Mega-cap, and large-cap tech in general, are going through a digestion period after more than doubling in the last 2.5 years. Positioning is also already heavily in their favor, so it makes sense to see some profit taking and rotation into other areas of the market given that everything looks relatively healthy economically.
We look at things like the Value line Geometric Index not as an end-all be-all for market direction, but as part of a list of evidence. It’s just one of many charts in the growing list of evidence in favor of a sustainable bull market. To name a few, major indices are healthy, market breadth is healthy, participation is expanding, and the median stock is making new highs.
If an increasing number of smaller companies are continuing to grow, innovate, and make money at the same time that the mega-caps are raking in hundreds of billions of dollars while inventing ever more powerful AI agents that are supposed to push out all competition, perhaps things are actually better than most are willing to admit.