BofA says an ominous signal from S&P 500 is pointing to gains

BLOOMBERG 

A Bank of America Corp (BofA) strategist says you shouldn’t be fooled by a seemingly bearish signal being flashed by the stocks in the S&P 500 Index. To the contrary, history shows it may even point to strong gains ahead.
The 50-day moving average of the S&P 500 Equal Weight Index — a version of the benchmark that gives an equal share to each constituent — slipped below its 200-day moving average. That pattern, known as a death cross, usually signals that the market is pushing below key support levels and may have further to fall.
But it doesn’t have such negative implications for main market-cap-weighted S&P 500, BofA’s Stephen Suttmeier wrote in a note to clients.
In fact, since 1992, the 19 prior death crosses for the equal-weighted version of the S&P 500 have been followed by “solid” returns for the traditional index, he wrote, with a median return of 2.6% in 20 days and 16.8% in 260 days. The S&P 500 even traded higher year-over-year in 15 of those instances.
The apparently negative technical indicator added to anxiety among traders about the relatively small number of stocks that have driven this year’s gains, thanks to their large weightings in the S&P 500. While the index is up over 7% this year, the equal-weight index is nearly flat.
But Suttmeier said the S&P 500 Index has actually staged major rallies in periods in which the equal-weight index has lagged it.
“When you have a concentration issue where bulk of returns are in mega-caps versus the average stock, the equal weight versus cap-weighted ratio drops,” Suttmeier said by phone. “It’s not necessarily bearish for the market. It  actually can be a positive.”
“Complaining about a concentration in indices makes a lot of sense because it’s harder to generate alpha if the stocks that are driving year-to-date returns in S&P 500 are just 10 different names — because if you don’t own those names, you’re not outperforming.”