Question for Henry: The SPX seems to be pretty important to your TA.
I was just reading this article, and I was wondering what you might think of how it would effect SPX charts if less successful companies drop off of it because they no longer meet market cap minimums or profit minimums:
Opinion: Everything you know about growth and value stocks is about to flip
The cogent part is in the second half of the article which I've copied and pasted below. He mostly talks about the mid and small cap indexes but I'm assuming the SPX also has minimums.
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Running out of stocks for S&P indicesWreaking havoc on traditional quant investing is just one of the under appreciated ripple effects of the coronavirus on the stock market. Another, according to Houssels, will be to reduce the pool of stocks eligible to be included in the various S&P indices.
That’s because Standard & Poor’s has market-cap minimums for inclusion in its S&P MidCap 400 and S&P 600 Small Cap benchmarks. They also require that companies not have negative earnings over the trailing 12 months, and that earnings in the most recent quarter be positive. As of mid-April, according to Houssels, 39% of the companies in the S&P MidCap 400 index were below the market-cap minimum, and 41% of the companies in the S&P Small Cap 600 index.
Once companies’ earnings reflect the impact of the pandemic, many of them will fail the negative earnings criteria. One scary data point in this regard comes from Vincent Deluard, Global Macro Strategist at INTL FCStone: He reports that 40% of the small- and midcap companies in the Russell 2000 index RUT, +1.57% don’t have enough net cash to cover even one month of expenses.
Not only will this reduce the number of companies eligible to be included in the S&P indices, it may lead to an outright reduction in the total number of publicly-traded companies. That’s because, Deluard argues, the cash-rich “tech mega caps” (Microsoft, Google, Apple, Facebook, Amazon, Oracle, and Cisco) should be able to “simply ‘name its price’ and buy any company they like.”
This would represent the acceleration of the “Winner Take All” trend I wrote about two months ago. In that column, I pointed out that an increasingly large percentage of corporate profits are accruing to a smaller and smaller group of companies. One consequence is a shrinkage in the number of publicly-traded companies. Right now, for example, the Wilshire 5000 index contains fewer than 4,000 stocks (only slightly more than half the number it contained in the late 1990s).
Up until now, the S&P 1500 index (along with its sub-indexes — the S&P 500, the S&P Small Cap 600, and the S&P MidCap 400) has not been affected by this shrinkage. But one side effect of the coronavirus pandemic is that even these indices will be affected.
The bottom line: A huge boulder has been dropped into the investment world’s ocean, and it will take a long time for the ripple effects to subside. A good rule of thumb for now and well into the future is: “Take nothing for granted” when it comes to your tried and true valuation metrics and market indicators. |
