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00:07 Speaker A
Here’s the big question in this AI driven bull market now in year four. Is this still a starter’s only rally where the mega caps do most of the work, or is the bench finally scoring? Relative strength is one of the cleanest ways to check that, and that’s what we’re digging into in today’s stocks in translation.
00:30 Speaker A
Now, relative strength is simple. You take one price and divide it by another price. Do that for each day’s close in two different markets and you’ll get one line that goes up, goes down, or goes sideways over time. If it rises, the first market is outperforming, and when the line falls, that means that the second market is winning. Sideways is a tie. And once you get that, you can use it everywhere.
00:54 Speaker A
So here are a few quick examples, all using different ETFs. You can divide consumer discretionary by consumer staples, XLY over XLP for risk on versus defensive, or look at the S&P 500 over the Russell 2000 for large cap versus small, high yield corporate bonds over US Treasuries for risky credit versus safe credit, and even gold versus silver to gauge a flight to safety versus an uptick in industrial demand.
01:21 Speaker A
But today we’re going to use this tool to see if this bull market is still being carried by just a few giant names or if it’s finally broadening. And we’re going to check out, we’re going to use here America’s benchmark stock index. That would be the S&P 500, but taking two different calculations. So on top, we’re going to use the market cap weighted version where bigger stocks get more votes and we’re going to divide that by the equal weighted version where each stock gets one vote.
01:52 Speaker A
The result is that line you see. And when it goes up, the bigger stocks are doing more of the scoring. When it goes down, most of the or more of the index is participating, using the bench. And this chart goes back to 1990, 1990 and you can really see the dot com boom and peak right there. That was a peak concentration and it was a steady decline into 2010 right here as the rally became much broader.
02:22 Speaker A
Now look at the last few years that I’m circling here. It’s been trending up again, which fits the Mag 7 dominant story. And we recently talked to Horizon’s chief investment offers officer, Scott Ladner on stocks in translation, here’s how he framed it.
02:44 Scott Ladner
The past couple of three years has been all about building up of of AI capabilities. That’s where the Mac 7 really matters and so they they’ve not performed, but these next couple years are going to be about diffusing AI throughout the entire economy.
02:59 Scott Ladner
Then the other 493 or the rest of the economy, the rest of the stocks can start to participate because they’re going to start using this great tool for for productivity enhancements.
03:09 Speaker A
Translation. The first phase was building the tools, a few companies did the heavy lifting, the next phase using the tools, and that’s what you can get more players on the scoreboard. Now let’s zoom in because this is where the story turns into a real time signal. And what we’re showing here is the last decade and you can see a slow rise into 2010, uh 2010 into 2020 when we had some wild swings over the pandemic.
03:41 Speaker A
That’s when leadership was changing wildly. And over the 22 bare market, 2022 bare market, both indexes were going down. But the giants, the starters, they were sinking faster, so the line trended down until the AI bull market and the era of the Mag 7 was born and that’s what I’m circling right here. The line has risen sharply and it hasn’t been straight up.
04:09 Speaker A
You can see some decent pullbacks when the mega cap stopped leading for a bit. But remember, this is about relative performance, one market versus the other. Here’s Ladner again.
04:22 Scott Ladner
I’m certainly not calling for Nvidia or Mac 7 or any of these these big these big Mac Cap names to go down. All they have to do is just sort of tread water or the other ones out perform.
04:32 Speaker A
And that’s the whole game. You don’t need to blow up in the starters, you just need the bench to contribute. So if you’re watching for a broader rally in 2026, the question isn’t only what Nvidia and Tesla are going to do tomorrow, it’s whether more of the S&P starts putting on points onto that board. So let’s get one more actionable bite from Scott about what to expect in 2026.
04:58 Scott Ladner
Specifically within that 493, we like cyclical plays. Those are the types of industries and stocks that we that we tend to like right now because we do think we’re going to get at least for the first half of 2026 a a really kind of run-it-hot type of scenario.
05:12 Speaker A
Run it hot. So keep an eye on the parts of the market that tend to benefit when growth picks up. Think industrials, retail and banks. Bottom line, this ratio is your breadth scoreboard. If it flattens or falls, the rally rally is actually getting healthier. And if you change the ticker inputs, you can make your own custom scoreboard. And tune into the Stocks and Translation podcast for more jargon busting deep dives. New episodes can be found on Tuesdays and Thursdays on Yahoo Finance’s website or wherever you find your podcast.