A great market divergence: Traders break down the split in the S&P 500

The big just keep getting bigger and the small smaller.

So far this year, the five largest stocks on the S&P 500 –Apple, Microsoft, Alphabet, Facebook and Amazon — have rallied double digits, but just one of the 50 smallest S&P 500 is in positive territory.

“This is a very interesting debate and I think probably the biggest question in the market right now and that is: Are the big boys going to come back to the smalls or are the smalls going to catch up to the bigs?” Joule Financial President Quint Tatro said Tuesday on CNBC’s “Trading Nation.”

While Tatro said it’s still too soon to answer that question, one lagging sector of the market does have him concerned that the mega-cap rally could lose some of its steam.

“Over history there have been some canaries in the coal mine per se,” said Tatro. “We continue to look at the financials that will not rally in this environment and that’s concerning to us. The financials should be rallying in the face of what we’re told will be a pretty significant economic rebound. Because they’re not, I am a little concerned that the bigs are getting ahead of themselves, and we’re proceeding with caution here despite how foolish that feels and seems at this time.”

The XLF financials ETF, which holds stocks such as Citigroup and Bank of America, has fallen 26% this year. By comparison, the S&P 500 is down 3%. 

Todd Gordon, managing director at Ascent Wealth Partners, says the key to the disconnect is in the sector makeup. 

“Of the bottom 50 stocks in the S&P in terms of market cap, 58% of those names are in three sectors — consumer discretionary, energy and [industrials] — none of which are in the top three sectors represented in the S&P.  Further those bottom 50 stocks are just 1% of the S&P market cap whereas those top five that you mentioned are like 29%,” Gordon said during the same segment. 

The discrepancy between the mega-cap and mid-cap stocks is clear when comparing the RSP equal weight S&P ETF with the market cap-weighted S&P 500, he says. The RSP ETF is down 12% this year. 

“These are obviously stocks that are left behind, sort of dinosaur industries and sectors in this new ‘work from home and order everything from Amazon’ kind of an economy,” Gordon said of the smallest 50 stocks. “I think we’re going to continue to stay with what’s working. We think this is a tech-led rally and it should continue.”