The following is an excerpt from the May 10, 2013 blog for Decision Point subscribers.
Apple (AAPL) has been rallying since it hit a 52-week low in April, a fact that has benefited the broad market in general and the technology sector in particular. It also gives us another opportunity to demonstrate the disadvantages of cap-weighted indexes compared to their equal-weighted counterparts.
Below we have aligned charts of AAPL, the Technology SPDR (XLK), and the Equal-Weighted Technology ETF (RYT). First we note the decline from mid-September to mid-November, which coincided with a broad market correction. While stocks in general declined, the technology sector really got hammered because of AAPL.
After the November low, the market began to rally but Technology suffered under the continued decline of AAPL; however, note that RYT (equal-weighted) exceeded its September high in January, but XLK (cap-weighted) did not rally past its September high until this week. More important, during that period RYT had nearly double the gains of XLK.
Conclusion: Conservatively speaking, sector exposure is usually best accomplished through a sector index rather than individual stocks, because risk is spread across many stocks. Equal-weighted indexes spread risk even farther, since no individual stock can influence the index more than other components. This is not to say that equal-weighted indexes are always the best choice, but it is a good place to start looking.
Technical analysis is a windsock, not a crystal ball.
