The S&P 500′s breakneck rally has hit a wall.
The benchmark index has fallen 7% from its record high set early this month and is tracking for its worst September since 2011.
“It’s important in a time like now we look at the charts and kind of get an idea of what’s happening, sort of set some boundaries around which the market is trading and help you control emotions you might be feeling as the market is pulling lower,” Todd Gordon, managing director of Ascent Wealth Partners, told CNBC’s “Trading Nation” on Thursday.
To best assess how markets are actually performing, Gordon looks to the RSP S&P 500 equal weight ETF which strips out the outsized influence the larger stocks have on the market cap-weighted S&P 500. The SPY ETF, which tracks the S&P 500, is on track for its third weekly loss in a row.
“If you look at the ratio right now, this is RSP or equal weight S&P 500 into your cap-weighted traditional SPY. If you take those two and divide them, you get an idea of who’s stronger, who’s weaker. In this chart below, you can see that we’re starting to come up off the lows here in the ratio, which means the RSP is right now on a relative basis outperforming the cap-weighted SPY,” said Gordon.
Gordon sees this as the smaller stocks beginning to participate in the rally while the large-cap FAANG stocks, including Amazon and Apple, take a breather.
“We’re seeing some other stocks like industrials and transports and materials, more cyclical names, start to gain some traction here,” said Gordon.
As for the market cap-weighted S&P 500, Gordon says the index has been in consolidation since the beginning of 2018. To resume the uptrend, he would need to see the S&P break through 3,700. On the downside, he says a pullback could take the index as low as 3,100, which coincides with the support line at its 50-week moving average.
The S&P 500 was trading at 3,332 on Friday.