Bets Against US Stock Market Biggest In Years

Bets Against US Stock Market Biggest In Years

almost 4 years ago2 mins

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Bets against the US S&P 500 are their biggest in years, according to new data – just as America’s five largest public companies account for their greatest share of the stock market in four decades 😬

What does this mean?

The S&P 500 is a “capitalization-weighted” index, its components sized according to the market value of their shares. If an investor puts $1,000 into an exchange-traded fund (ETF) tracking the index, they don’t buy $2 worth of 500 companies; instead, their money would currently be 21.4% invested in the five largest firms – Microsoft, Apple, Amazon, Alphabet andFacebook – and 78.6% in the other 495.

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But while tech stocks’ domination of the S&P 500 may be fine when their prices are going up, some are concerned about potential overexposure to the sector in light of its extra volatility and ongoing regulatory risks 🕵️‍♂️

The entire index may be looking wobbly, however. “Short sellers” have raised their bets against the biggest S&P 500 ETF by over 60% this year, suggesting they think – along with research firm TS Lombard– that the recent market comeback may be premature…

Why should I care?

Investing in the whole S&P 500 is a low-cost way to benefit from broad success at consistently profitable companies (which is why it doesn’t yet include Tesla). Earnings-, dividend-, and even equal-weighted alternatives are available – but the main index has done well in recent weeks. Big stocks have actually fared better than smaller ones, perhaps due to their heightened brand recognition, ability to borrow – and chances of surviving a recession.

The even more tech-focused Nasdaq index outperformed the S&P 500 last week
The even more tech-focused Nasdaq index outperformed the S&P 500 last week

Still, simultaneous rises in the prices of government bonds and gold prove not everyone's convinced the economic recovery from the coronavirus will be V-shaped. According to FactSet, average S&P 500 company earnings are expected to be 15% lower than last year for the first quarter – and 27% lower for the second. How investors might take any worse news for tech stocks remains to be seen… 🧐

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