Rather than saying that US stock index has been a victory of institutionalization of US stocks, it is better to say that it is a victory of large-scale constituent stocks. Imagine a situation where the sum of the weights of the top ten components of a stock index exceeds 50% of all stock weights, then the rise or fall of the stock index will completely depend on the performance of the top ten weighted stocks. To create the illusion that the stock index has been bullish for decades, institutional investors only need to join forces to buy high-weight stocks. In other words, this extremely unreasonable model of weight distribution will lead to the trend of the index that cannot represent the fundamentals of most listed companies. For example: The figure below is the stock price trend of the US stock Fox (FOX), which accounts for less than 0.01% of the US stock index. Its rise or fall will not have any impact on the stock index.
Just went public in 2013, FOX's stock price is US$30.26, and the current market price is US$29.89. Not only has it not risen in eight years, it has also seen a slight decline. From 2014 to 2016, the stock price fell from 37.8 to 22.6 in two years; from 2019 to 2020, the stock price fell from the highest $51.8 to the lowest $19.1. FOX's performance is in a subversive contrast to what we usually call "the long bull market for ten years in the US stock market".
The US stock market has three major indexes, namely: Nasdaq 100, S&P 500, and Dow Jones Industrial Average. Traditional logic believes that the rise of these three major stock indexes simultaneously represents the bull market in the US stock market. In fact, the rise of the three major stock indexes only means that the top ten major stocks have a bull market for these three major stock indexes, while the remaining hundreds of stocks are likely to be in fluctuations and downward trends. Weighted stocks and non-weighted stocks have a binary opposition pattern of one rising and the other falling.
0Stark 100 Index Top Ten Weighted Stocks
It can be seen that Apple (Apple ) accounts for as high as 12.637%, which exceeds the sum of the weights of dozens of low-weighted stocks . The sum of the weights of the top ten weighted stocks, after a simple calculation, is 52.403%, accounting for half of the Nasdaq Index. This is a very distorted weight distribution model and cannot reflect the rise and fall of most individual stocks.
In terms of weight allocation, the Chinese A-share market performed relatively better. Taking the Shanghai and Shenzhen 300 as an example, the stock with the highest weight is Kweichow Moutai, with a weight of 5.28%. Although it is not low, it is within an acceptable range. The total weight of the top ten weighted stocks is 25.58%, far lower than the 52.403% of the Nasdaq Index, and is also in a relatively healthy state. Chinese stock investors often say: "The index rises, but not individual stocks" and "light stock indexes, but focus on individual stocks." It means that the stock index cannot represent the rise and fall of most stocks. In this regard, the feelings of American investors are probably deeper than those of Chinese investors.
Perhaps the list pattern in the figure above cannot clearly highlight the abnormal weight of the US stock market. Let’s show the pie chart weight below, so it will be clear at a glance:
It can be seen that small-weight stocks are concentrated in the small space in the upper left corner, and even the name cannot be identified, while large-weight stocks can occupy all the space on the right, and the names are clearly visible.
Since the rise in US stocks is one of the political achievements of the US government, successive US presidents do not want the stock index to fall sharply. For example, in March 2020, due to the spread of the new crown pneumonia epidemic, the three major U.S. stock indexes experienced continuous circuit breakers. In order to prevent this panic decline, the Federal Reserve cut interest rates by 50 basis points within a month and distributed more than 4 trillion US dollars to support the economy. It can be said that the whole United States is closely watching the changes in the stock index. When it experiences an abnormal decline, all American institutions will work together to restore it to normal. This is also why in our daily exchange reviews, whenever we mention the US stock index, we will mention the assertion that "the callback is the buying point", which is actually "pull the wool of the US government."
not only has the Nasdaq index, but the weight allocation of the other two stock indexes is also very unreasonable.
The following figure shows the top ten heavyweight stocks in the S&P 500 index:
Have you found anything wrong?
Yes, the top ten weighted stocks in the Nasdaq Index and the top ten weighted stocks in the S&P 500 Index are basically the same stocks. Apple , Microsoft , Amazon , Facebook, Tesla, and Google, these six stocks exist in the two major stock indexes at the same time, and are among the top six high-powered individual stocks. In other words, as long as American financial institutions buy these six stocks in large quantities, they can raise the two major stock indexes of , Nasdaq and S&P 500 at the same time.
The chart shows the list of constituent stocks of the Dow Jones Industrial Average
It can be seen that the top ten heavyweight stocks of Dow Jones, only Microsoft (MSFT) overlaps with the Nasdaq and S&P 500 indexes, and the others are different stocks. This also means that the overall trend of Dow Jones will have a certain degree of difference from the trends of the other two stock indexes. Although the weight stocks are different, the distorted weight distribution is the same. The total weight of the top ten heavyweight stocks in the Dow Jones Industrial Average is 51.76%. Similarly, if institutions want to make the stock index trend beautiful, there is no need to care about the remaining hundreds of stocks. Just buy these ten heavyweight stocks.
ATFX Disclaimer: The above analysis only represents the analyst's views. The foreign exchange market is risky, so investment should be cautious. ATFX will not be responsible for any profit or loss that may arise from direct or indirect use or reliance on this information.
