Apple (AAPL) has been rallying since it hit a 52-week low in April, a fact that has benefited the broad market in general and the technology sector in particular. It also gives us another opportunity to demonstrate the disadvantages of cap-weighted indexes compared to their equal-weighted counterparts.
(This is an excerpt from recent blogs for Decision Point subscribers.)
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Below we have aligned charts of AAPL, the Technology SPDR (XLK), and the Equal-Weighted Technology ETF (RYT). First we note the decline from mid-September to mid-November, which coincided with a broad market correction. While stocks in general declined, the technology sector really got hammered because of AAPL.
After the November low, the market began to rally but Technology suffered under the continued decline of AAPL; however, note that RYT (equal-weighted) exceeded its September high in January, but XLK (cap-weighted) did not rally past its September high until this week. More important, during that period RYT had nearly double the gains of XLK.
Conclusion: Conservatively speaking, sector exposure is usually best accomplished through a sector index rather than individual stocks, because risk is spread across many stocks. Equal-weighted indexes spread risk even farther, since no individual stock can influence the index more than other components. This is not to say that equal-weighted indexes are always the best choice, but it is a good place to start looking.
Images: Flickr (licence attribution)
About The Author
Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.